Penny stocks are stocks that are priced at less than $5, as laid down by the Securities and Exchange Commission. Making money from buying and selling penny stocks is not something out of the box. On certain occasions, these stocks are also known as micro-cap stocks. However, there are certain differences between micro-cap stocks and penny stocks. Penny stocks are named so because of their prices and micro-cap stocks are categorized on the basis of their market capitalization. A stock which has a market capitalization of between $50 and $300 million is known as a micro-cap stock.
Tips and tricks to make money from penny stocks
Making money from penny stocks will depend on a number of factors. Some of them have been discussed below in detail:
1) Determine the risky stocks
You have to determine investing in which penny stocks is a risky proposition. This is because of the reason that this kind of stock is the trickiest and most unpredictable type of investment in the market.
2) Invest what your budget permits
Investing a huge amount in penny stocks is absolutely a ‘no-no’. If you fail to buy and sell prudently, you might face huge losses. Make sure that you have adequate amount saved to counterbalance your losses.
3) Gather more knowledge about the particular features of penny stocks
When you become well-versed with the features of these stocks that make them vulnerable, then you will automatically start taking good decisions at the time of trading with them. Know how market capitalization, shareholding patterns and cash flow work as key factors behind the price variations of such stocks.
4) Try to decline the following varieties of stocks
§ Companies which have a revenue below $10 million per year
§ Stocks which are not bought or sold on any of the key stock exchanges in the U.S. (they are also known as over-the-counter OTC or bulletin board stocks)
§ Companies in sectors about which you don’t have a clear idea (founded on your level of experience)
§ Any company which has advised you to buy penny stock via e-mails (promoters are frequently given money for generating a propaganda in order that the stocks are sold)
5) Know that investing is your business and not pastime
You need to understand and handle both your profits and losses. Keep in mind that you are not investing here for passing time but for making money like any businessman. This understanding will make your task simpler.
6) Gather some experience in trading mid and large-cap stocks
You should have one year experience in trading mid and large-cap stocks before entering the domain of penny stocks. This will help you a lot since you are quite familiar with reading balance sheets and cash flow statements of the companies.
7) Do a lot of reading
Read plenty of topics related to corporate finance, personal finance, investment concepts, rules of taxation, and economics to become a better trader.
8) If possible, go for day trading
Day trading is definitely a good way to go for penny stocks. When you do day trading, there is no risk of viewing the rate of the stock slump throughout a long term. In day trading, you are buying and selling the stocks during the same day and even inside a few hours and have the opportunity to lock your gains. There is no reason to be concerned regarding the stocks the next day since they have been already sold and you have made gains from them.
Remember the following tips to make money from penny stocks
§ Always search for “red flags”. These are the familiar features of companies defrauding customers or functioning for the exclusive goal of fund collection through stock dilution.
§ Stay away from companies that have a significant debt load.
§ Find out companies which have time and again produced steady cash flows and are developing them with time.
§ Purchase from companies at a quite nominal multiple on their cash flow (the perfect one is below 6 times).
§ Rather than stock rates, you need to evaluate price per share versus book value per share (by subtracting liabilities from assets).
§ Restrict any small stock to simply 5% of your portfolio.
So, these are the facts that you need to take into consideration while trading in penny stocks. You should be prepared for both gains and losses in this business.
Marie has considerable experience in writing for stock and bond related topics. She has written informative reviews and blogs on many sites including Unitedfinances.com.