Published On: Mon, Oct 28th, 2019

4 Tips to Getting Started Investing in Penny Stocks

We’ve all received the email that promises to help us get rich quick by investing in penny stocks. While most of it is garbage, it does raise some valid questions. What are penny stocks? Are penny stocks right for me? What penny stocks should I invest in? How do I get started?

To be blunt, most investors avoid them because they’re so volatile, and most people who own penny stocks are speculators trying to make a quick buck. If that intrigues you, read on.

  1. Know Penny Stocks are Volatile

If you want to know how to invest in penny stocks, for starts you should know these are stocks that sell for less than $5 a share. They are known for their volatility, often falling 50 percent or doubling in value overnight. Some old companies with big problems such as Sears are penny stocks, and some new companies such as cannabis stocks are as well.

photo Roman Oleinik via wikimedia commons

  1. It’s All About the Short Term

If you’re all about the short term, penny stocks might be for you. Penny stocks are typically bought and sold via “day trading”. Day trading is buying and selling a stock within a short time period while investing is buying and holding a stock. Most people who trade penny stocks are day traders. Penny stocks are all about the short term. Buy, wait for the price to increase, then sell and move on.

Warning: only about 10 percent of investors in penny stocks will see a profit. So how do you become part of that elite 10 percent? You predict which stocks will move before anyone else. If you have heard about a popular penny stock in the news, so has everyone else, and it’s too late to profit.

Beware – penny stocks are so vulnerable to manipulation there’s are two scams: “pump and dump”, where a person starts a rumor to drive up the price of a stock and then sells before the truth gets out, and “short and distort”, where a person starts a negative rumor about a company and buys up the plummeting stock.

  1. Do Your Research

It’s all up to you, but the classic advice “Buy what you know” holds true here. If you’re techno-savvy, try technology stocks. But before you invest, do your research.

  • Make sure the company is making money.
  • Make sure it has substantial cash and assets.
  • Make sure it has a strategy to grow.

The good news is you can find this information for stocks on the major exchanges. For over-the-counter (OTC) stocks, caveat emptor, but you can minimize your risk by trading OTC stocks on the OTCQX tier.

  1. Watch Out for Fees

Most major brokerages allow you to buy and sell penny stocks, but there may be a fee involved. An app called Robinhood allows you to buy and sell stocks without paying a broker’s fee, and some brokers such as E-Trade and TD Ameritrade do not charge commissions.

Start small. Make penny stocks 10 percent or less of your portfolio until you master the art of buying low and selling high. Remember, it’s easy to lose your shirt.

Finally, check the daily trading volume. It doesn’t matter how much your stock is worth if you can’t sell it! Do your research before you decide on investing in penny stocks.

Author: Shan Ge

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