As a person who’s always interested in looking at ways to make a buck or two, I decided to look into penny stocks. Any investment vehicle with potential for very high returns in a relatively short amount time is intriguing. However, there is much more to picking winning penny stocks than doing a simple internet search for “hot penny stock tips”.
This article will cover:
- What Penny Stocks Are
- How Wise Of An Investment They Are
- Income Potential
- Penny Stock Tips
- How To learn A Trading Strategy
- My Overall Take On Investing In Penny Stocks
What Are Penny Stocks?
Penny stocks, as the name suggests, can sometimes be purchased for pennies per share but can cost as much as just under $5 per share. Price is not the only factor. The company selling the stock must have a market capitalization of less than $300 million.
Companies with a market cap of $300 million to $2 billion are considered small cap stocks regardless of the stock price.
Penny stocks are not typically sold on major exchanges. They are sold over-the-counter and may be offered through a hard-sell phone call with a potential investor. The movie “Wolf Of Wall street” offers a comical view of the world of penny stock promoters.
Are Penny Stocks A Wise Investment?
Whether or not anything can be considered a wise investment depends on your own investment objectives. For example; are you hoping to make quick, profitable trades or are you hoping for long term growth? It’s important to know upfront because investing and trading are two very different things.
Traders focus on market “moods” and constantly jump in and out of stocks looking for quick gains. A trader doesn’t worry about the financials or the long term prospects of the company. Buy low and sell high as often as possible is their only goal.
I have friends who trade Bitcoin and they are constantly jumping in and out of the market trying to capitalize on spikes in the price. If you can find a stock or something like Bitcoin that is highly volatile and you can sit in front of a computer screen all day, it can be very lucrative.
The problem is, everything levels out eventually and you need to go looking for a new opportunity.
An investor wants the potential of long term growth and possibly dividends or both in some cases. The investor isn’t concerned with day-to-day fluctuations in price and is usually confident in the long term value of the stocks they purchase.
In a nutshell, traders want quick profits while investors want cash flow. Which do you want? It’s helpful to know before you enter the markets. Neither one is better than the other. It’s a mater of personal preference. Either way, you will need to do your due diligence.
How Much Money Can You Make With Penny Stocks?
Ironically, the last thing you want to do is to google that question. You will find plenty of websites with extraordinary claims of astronomical gains in a short period of time. These are the exception, not the rule (if they are credible at all).
If you want to get an idea of how much money you could potentially earn trading penny stocks, you simply need to do some basic math.
Let’s say you find a stock selling for 25 cents per share and you have $1,000 to invest. That would buy you 4,000 shares. If the price rises to 50 cents per share, you would earn a profit of $1,000.
These kinds of gains are common among penny stocks but there is no reliable way to predict which stocks will move and when. Timing is everything when it comes to trading and if you have a full time day job, you’re going to have a very difficult time making this work.
In my opinion, the best way to make money from penny stocks would be to build your own website and promote penny stock courses as an affiliate.
What Are The Risks?
Penny stocks are probably the riskiest of all stocks. Especially considering how hard it is to get a true financial picture of many companies that offer penny stocks. Because they are not listed on major exchanges, they don’t have to fully disclose all of their financial information. They could be headed for bankruptcy and their investors would have no way of knowing ahead of time.
Another problem is lack of liquidity. Imagine that 25 cent stock quickly rose to $1 per share. $1,000 invested would now be $4,000.
Great!……… But here’s the problem.
There may be no buyers at that price! Not many people want to buy a stock that has just tripled in price. So, you may have to wait for the price to drop before more buyers come along.
Penny stock companies are often over leveraged and under funded. Many companies go public as a last ditch effort to raise enough capital to keep the doors open for one more year. That’s why it is important to pay close attention to a company’s financials when considering a penny stock.
How To Find Hot Penny Stock Tips
I’m sure there are plenty “news letters” you can subscribe to that will periodically offer penny stock tips.
How reliable are these stock tips? I’m not sure to be honest with you. They usually offer trading courses of their own which is why they want you on their mailing list. You can always track their recommendations yourself and see how well they do without risking any of your own money. My guess is that they will be right on some things and wrong on others. The odds are probably 50/50.
Learning To Trade Penny Stocks
If you have decided that you still want to learn to trade penny stocks, there are a few things you’ll want to keep in mind.
1. Don’t invest money that you really can’t afford to lose!
The financial markets are a dog-eat-dog world and those who don’t know what they’re doing often end up handing their money over to those that do. Start off small and if you do make a profit, take your original investment out and play with house money.
2. Pay attention to daily trading volume.
The higher the trading volume, the better your chances of exiting your position at your target price.
One penny stock trading expert I read about won’t hold more than 10% of the average daily trading volume.
So, if the daily trading volume is 100,000 shares, he won’t hold more that 10,000 shares.
3. Invest in what you know.
You do not have to be an industry expert, but it helps to know a little about what the company does before you invest. Warren Buffet, considered by many to be the worlds greatest investor, won’t buy a stock if you can’t sum up what the company does in a coupe of sentences.
4. Take hot stock tips with a grain of salt.
For a while, marijuana penny stocks were all the rage after it was legalized to some degree by a number of States, It sounds like a no-brainer on the surface but there are still many governmental obstacles to navigate. There is no guarantee when or if any particular company will profit from such laws. Again, do your due diligence.
If you subscribe to any penny stock newsletters, make sure to read their disclaimer. You may learn that they are being paid to promote certain stocks. “Pay to play” is one reason why many people find penny stocks to be a bit sketchy. It requires you to be a little more vigilant when doing your research.
5. Don’t let greed get the best of you. If you find yourself quickly in a profitable position and the price seems to have topped out (for now) don’t be afraid to sell. It can be tempting to hold out for even greater gains and that is how a lot of money is lost. Remember, you can’t lose money by taking a profit.
My Take On Penny Stock Investing
While I do find the idea of earning such high returns in a short amount of time appealing, I personally find penny stocks a little too risky. I find trading to be a lot like gambling and that is not a sound financial plan for me. I tend to think more like an investor. I appreciate assets that continue to throw off a monthly cash flow even after that asset has paid for itself.
That’s why I appreciate building websites. For the price of a domain name (around $12) per year, I can build an income producing asset out of thin air! It’s a great way to begin building a portfolio. Especially for people who don’t have a lot of disposable income.
Want to learn more? Get started for free here.
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