Penny Stocks 101 – What You Need to Know

What you need to know about Penny Stocks

Before thinking about investing in penny stocks, here’s what you need to know about them. There’s no definite way to describe a penny stock. It is typically a stock that trades from $5 to as low as to even a fraction of a penny. Its low price doesn’t mean it trades as many shares as higher-priced stocks.

Penny stocks are known for being a risky investment. They include some of the smallest companies; therefore, to ensure you won’t lose the entire investment, there are some points to keep in mind.

Penny Stocks
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–         The risks that come with it.

–         Understanding its volatility.

–         Looking out for scams.

–         Pick the right companies.

Those stocks also contain some of the market’s shadiest firms. Frauds and various pump-and-dump scams, in which hired promoters push a stock to cause it to rise in price so that insiders could sell at a higher price.

Where are they sold?

Penny stocks are not found on major exchanges like the New York Stock Exchange or Nasdaq. Instead, they’re on the pink sheets and are traded over the counter. The small companies that stand behind penny stocks are unclear about their financial status and governance. This is because they’re not on major exchanges. To invest in these stocks, you need to have a high-risk tolerance.

Penny Stocks 101 - What You Need to Know
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How to make money with penny stocks?

Making money with penny stocks is known to be tricky. Penny stocks, as we mentioned earlier, are usually companies that are at the beginning of their journey. You have to be able to separate the good companies from the bad. This comes hand in hand with analyzing which company will succeed in the future and which won’t. Without this skill, you are at the risk of loss, and your success in penny stocks is close to zero.

Keep yourself up to date with the latest news about the company. Be in contact with the company and get as much info as you may need to give you enough confidence to buy a share.

Search for the following types of companies:

–         Start-ups with a clever business plan or idea.

–         Companies that have a profitable partnership or endeavor in mind.

–         Companies with a strong basis and ability to compete in the industry.  

Myths about penny stocks:

Many believe trading penny stocks have high potential and that it’s a stock that people have yet to discover. Of course, very few penny stocks are known to have high potential. However, most penny stocks are new businesses or companies that are failing in the industry. They are far from being a hidden gem that investors have undiscovered.

Penny Stocks 101 - What You Need to Know
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Penny stock investors often believe that if the stock price goes up by one dollar, it’ll double and bring future results. Stocks rise and fall throughout time based on their profitability and investors’ expectations of future profitability. A stock must show considerable potential to be worth ten times its current price. However, penny stocks rarely show this kind of potential. They may jump from time to time, but they will not see the type of gain that can make you rich.

When investors discover penny stocks, they often like that they can purchase thousands of shares, whereas just a few shares of a high-priced stock. If the stock trades at $0.25, they could buy 1,000 shares for just $250. A low share price gives the impression that the stock is inexpensive, although this is rarely the case. They may then assume that if the stock rises by $1, they will profit by $1,000. With this in mind, a successful company whose stock is selling at the $200 mark can be more profitable than any penny stock.

If penny stocks are something you’re interested in buying and selling, then you need to know how to analyze companies. Picking the good businesses from the bad is the most crucial for success in penny stocks. Although there are many risks involved with penny stocks, it helps to know information about the company you are looking to invest in and their financial data.

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Penny Stocks 101 – What You Need to Know
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