Penny stocks are low priced stocks with limited market capitalization. They have little shareholders, sizeable bid-ask spreads, restricted information disclosure and low liquidity patterns. They are highly volatile and carry great potentials of both rewards and risks. Their prices can be manipulated by purchasing huge numbers of shares and precipitating a spike or offloading shares causing an abrupt nosedive.
There are few important points that every trader at all levels should consider while buying penny stocks. Here are seven such tips you seriously need to mull over.
- Basic research on the company
The first and foremost thing you need to do when deciding which penny stock to buy is to conduct a quick Google search. Quite often, this simple and quick step can provide you sufficient vital information to ascertain if the stock is worth your research, time, and investment.
- The unpredictability of the stock price
The volatility of the stock price is another crucial factor to consider while opting for a specific penny stock. You don’t need stocks that are down trending or moving at a snail’s pace for months. You want stocks that show rapid spikes with sustained stability. The stocks that exhibit a steady upward moving swing are the best bets to buy.
- The volume of the stock
It’s a typical newbie botch-up: you get too much fixated-on stocks that show consistent movement. You disregard to take a glance at the volume. This tremendous blunder can lose you a lot of money. A stock volume is the number of shares that change hands on a given day. Not just volatility, liquidity also matters. A company’s press release may look quite enticing. However, if there is minimal volume to support, refrain from trading it.
- Catalytic triggers and patterns
Think about considering a catalyst to prompt your selection of the penny stocks. In the share trading system, a catalyst is something that triggers an event or a release thereby adding momentum in elevating the stock value. Your ability to scout for such news and information on a broad scale can provide you gainful insights to handpick reliable catalysts and clinch a stock worth your investment. Study and analyze what patterns make a trade work and what doesn’t. Engage in knowledgeable decisions for your trades and investments to mitigate future risks.
- Word-of-mouth and hearsay
Listening to the buzz about penny stocks is excellent. Looking at what others do and say while choosing penny stocks is appreciated. However, don’t aimlessly follow the leads from stock traders and promoters. Have an independent, unbiased approach. Whatever works for others may necessarily not work for you. Instead, engage in consistent observation and learning, rely on your experience and make authentic and appropriate decisions to forge success in penny stock trading.
- Manipulation by brokers/promoters
Because of their shallow volume, penny stocks are susceptible to tampering by stockbrokers, promoters, and market participants of the company. As an investor, you need to be cautious about hoax companies that show sudden price spikes without any favourable news or press information. Companies with consistent positive performance and impeccable prospects are the safest bets.
- Time of the day
Not to detonate your psyche. Nevertheless, all bets and tradings are strangely contingent on the time of the day. The time whether its morning, early afternoon, mid-day afternoon or the evening essentially defines the yardstick to rank the best stocks for that day. Stock price fluctuation has an inherent linkage to the diurnal variation. As for penny stocks, experts suggest trading only during the morning hours.