Penny stocks are a risky proposition, not for faint hearts and definitely not for people in debt or who struggling to keep us with saving money. Penny stock trading for one who’s built up sufficient emergency fund, retirement fund.
Rather like the stories of sailors being drawn to the call of sirens, the lure of penny stocks calls out to many investors who are tempted by the prospect of turning a small investment into a sizeable profit when the stock takes off.
Investors might consider Money Morning as a great resource for checking on penny stocks, but how do you pick the right ones in the first place and avoid the call of the ones that could be trouble?
If you are wondering what the potential returns could be when investing in some penny stocks, you will no doubt be encouraged by some remarkable success stories that have seen some investors make some spectacular returns.
One example would be a fuel cell stock in the name of Plug Power Inc. The share price history of this stock gave a very little hint of what was coming, having spent a considerable trading period under $5 and even sinking as low as 26 cents at one point.
After announcing some new supply deals and a return to profit for the business, some investors managed to post gains of over 700% as the share price climbed in response.
It still trades as a penny stock and the current price is well under $5, which illustrates the volatility and opportunity that exists for investors with a high-risk profile.
This is just one example of how you trade penny stocks for profit, and it also illustrates that timing is often everything, as not everyone made money from the rise and fall of this stock, and many others like it.
The home of speculative trades
In order to attempt to profit from penny stocks, it is important to understand exactly what you are getting yourself into, as these types of securities are representative of some of the most speculative investments around for traders and investors.
Any stock that is trading under $5.00 is classed as a penny stock, and there is often a reason why they are operating in this particular investment pond rather than swimming amongst the bigger fish in open waters.
Think of companies that are in biotech or fintech industries and you should form an opinion that you can see why their stock price could be so adversely or positively affected by something like a technical breakthrough or a failed test.
It is not unusual to witness huge swings in a stock’s share price as a result of a news announcement, and these small companies can sometimes be starved of the oxygen of finance and turnover, to the point of no return where they become extinct and your total investment goes with it.
If you are under no illusions about the risk to your capital but are prepared to speculate a small percentage of your capital in the hope that you can hit on a winner, then trading in penny stocks might just work for you.
Liquidity is vital
A good strategy to adopt when trading penny stocks is to be disciplined enough to only trade penny stocks that offer good liquidity.
Illiquid penny stocks can be a real problem, as you want to be able to sell your stock with relative ease when the opportunity arises, so it often pays to be guided by volume so that you have options as a trader.
Little and often
Successful penny stock traders seem to have a common trait amongst most of them, which is that it is normally a better strategy to trade plenty of penny stocks in order to spread the risk, rather than going all-in on one play, hoping to find the next Apple story.
Traders who operate on a daily basis within the choppy waters of penny stocks are often looking to post small gains on one stock and move on to the next opportunity.
This approach can see you build wealth and make money over time, without being exposed to a scenario where you get virtually wiped out by one trade that hits the rocks.
One way of approaching the idea of playing penny stocks is to focus on making a consistent return by trading rather than investing in these type of shares.
Trading and investing are fundamentally different, and if you take the little and often approach to penny stock trading, you might be able to avoid the big losses, as a result of not trying to be too greedy.
If you want to get started in trading penny stocks, it normally pays to do so with a specific strategy that works for you and it may just turn out that you manage to unearth a stock that turns out to be one of those success stories you read about.
About the Author: Joshua Christian became interested in penny stocks several years ago. He now writes on the subject, sharing his knowledge and experience with those just starting out.