Penny stock trading depends on your risk-taking ability. If you have the potential to take perils and acknowledge the different stocks through fundamental and technical analysis, profits can flow. Investment in blue-chip stocks is one of the sure-shot ways to earn an easy buck. Their products and services rule the market. Hence, there’s hardly or the least disadvantage involved in it.
On the other hand, Penny stocks are public companies that belong to high risk and low-price classes. So, penny stock trading is complex for traders.
These companies tempt traders to invest in them with an illusion of extreme profits or magnifying. Speculative traders are mostly on the radar of such stocks. People get driven by the greed of earning enormous money in a short time. However, they may be beneficial, but one has to be cautious. The following article sheds light on penny stock trading.
What is Penny Stock Trading ?
Earlier, penny stocks were those stocks that have a per-share value of less than one dollar. In several nations, any stock that trades around or less than USD 5 is categorised under penny stocks. Moreover, the price of such stocks hardly rises. However, sometimes it may happen that due to unforeseen attention, there’s a huge rise. So, investors can take advantage of the movement. But the situation won’t stay for a long time, and the stock prices would fall flat.
Meanwhile, there have been instances that penny stocks found a listing in reputed exchanges like the NYSE (New York Stock Exchange). However, they trade through OTC (Over-The-Counter) transactions. They use OTC market groups (owned privately) or electronic OTCBB (OTC Bulletin Board). Notably, OTC transactions do not find any trading floor. Moreover, quotations take place electronically here.
Thus, penny stocks belong to companies that have a small market capitalisation and are also on the verge of delisting from a small exchange. Precisely, penny stocks are used during huge trend swings, high volatility and scams or frauds. So, a trader’s discretion is always advised here while initiating penny stock trading.
Penny stock companies generally target inexperienced investors.
Detailed information about penny stock company
Attempts have been made to mainstream penny stock trading and integrate it into the elite trading market. SEC (Securities and Exchange Commission of the US) modified the parameters to include most penny stocks into major stock exchanges. The agency works towards protecting investors’ interests and saving them from potential losses that may occur in the market while trading stocks. It is a federal government agency that is independent.
Its primary duty is to maintain orderly functioning and fair trading in the securities market.
The lack of liquidity in penny stocks is the biggest reason no one wants to invest in them. Those who make the investment either have to wait for the longest time or leave their hopes. So, it is important to understand that even if someone wishes to invest in the market must not put a big chunk of their funds into them. The buyers hardly exhibit any interest in buying them. Also, looking at their growth prospects, the product and services they sell have zero to low probability to make an impact in the market.
Their balance sheet and income statement do not show any credible outputs or inputs that a trader can trust and invest in them. Also, there’s no guarantee of dividends. So, even long-term traders distance themselves from penny stocks. Moreover, most online brokers do not provide services to trade penny stocks.
Furthermore, the prices of penny stocks do not present the actual picture of the market. So, when there’s a bearish trend, these stocks may continue to fall.
Hence, due to price quotes or comprehensive bidding and asking prices, and the tiny size of companies, the stocks of these companies remain speculative but on the borderline. In short, any investor who puts his money in it may lose all funds or a sizeable amount.
However, no one wants to lose money with low trading volumes during penny stock trading. Even stock promoters stay away from promoting such stocks. Therefore, a buyer is at his/her own risk.
Growth in Penny stock trading
Experts believe that penny stocks are majorly driven by pump and dump schemes and market manipulation. However, on the flip side, there have been companies that started as a penny but went onto scale heights with their futuristic prospects and ability to excel in the quality production of goods and services. But the reality is that there are only a handful of firms or companies that could do that.
Several marketplaces globally offer listings to penny stock companies looking at their growth prospects. So, traders who are capable of taking high trading risks can enter them. There are huge risk and reward factors attached to them also.
Interestingly, when there’s volatility, it is high that can result in great results or outcomes irrespective of inherent perils. For example, in intraday trading, an investor can sometimes lose more than their investment while buying on margin. So, borrowing money from the bank or a broker should be a big no for someone wishing to trade with a penny stock.
So, precautions must be initiated by brokers for the safety of their funds. So, it is recommended that these investors should apply stop-loss for saving their funds from draining. However, if the share rises, the gains could be explosives. That can get you to achieve bigger heights. So, before investing in the market, proactive measures should be initiated by traders.
Stop-loss orders help in setting a limit that can help you when the stock price slips. Suppose the price of a share is USD 3 and you’ve put a stop loss on USD 2, then your position will be closed. So, even if the price goes to zero, you won’t lose all your funds. So, automatic selling works as a saviour here.
Also, one must not get into peer information or pressure. It is essential to tie realistic expectations. They are important to keep you grounded and look at the market more realistically and not emotionally.
Trading penny stocks
Penny stocks sustain because they keep on receiving small fundings from the market. Several traders do that because shares of such companies allow them to hold huge quantities, which is not possible in the case of buying a reputed company’s share. Like Tesla’s shares are pegged at USD 647. So, only rich people can dare to buy larger quantities. So, penny stocks work like a comforter for such traders.
Moreover, there are chances that businesses of penny stocks go on to become a conglomerate. These companies utilise these small platforms to move up to bigger marketplaces. So, it is not necessary that all penny stock companies are going toward bankruptcy. Some of them are putting their blood and sweats to move it upwards.
So, when someone invests a significant amount, these stocks rally up and exhibit bigger volatility than anticipated. That is the phase and feature which attract traders. The low prices work as an elixir for investors.
Comparatively, blue-chip stocks are safe for traders. They are nationally recognised sound, their functionality in the market is optimum, and well established. Their products and services have wide acceptability in financial markets. Moreover, heavy downturns are easily withered by blue-chip companies. So, even when the market conditions deteriorate or go averse, these stocks weather the condition and do not fuss about them. People holding them can hold them for a long term.
Their growth is reliable and sustainable. All in all, these stocks are opposite to penny stocks. But blue-chip shares have the tendency of volatility and high fluctuations. So, you can earn huge gains. In addition, the dividends are high. Therefore, they have the potential for better prospects.
Can you gain rewards or money through penny stock trading?
There are technicalities and strategies that enable you to make money with any type of stock, irrespective of the circumstances. Learned investors focus on their stock picks to make money. Price is immaterial for them. They take long term chances. There are several good reasons why one must not always refrain from buying small company shares. The fast-growing companies whose share prices are within reach of a trader must be purchased for better gains.
Learned traders or veterans of the market predict it by fundamental and technical analysis and thoroughly going through a company’s profile. Thus, the preparation works in their favour by offering them the essential information of the company. So, the key to being successful is, recognising the potential of a penny stock and how far can it stretch. People who stretch their wait period end up witnessing the company growing into a giant. Therefore, one must buy penny stocks when they’re at the bottom.
Moreover, do not fall for the appearance that penny stocks are available for bargains. They are not. However, penny stocks also work as a vehicle for frauds or con artists to inflict cheating on investors.
Penny stocks segregated in 4 Tiers
Penny stocks can be segregated into four tiers as per their valuations.
Tier 1 : These penny stocks manage to find listings on some of the world’s best exchanges including, NYSE and NASDAQ. They are pegged at prices below USD 5. However, due to a sudden spike, they may be available at a higher value. Their standards are higher compared to the OTC penny stocks. It is because their financial information is available in the public domain through the exchange. Thus, they are more believable. So, there’s less chance they can get manipulated by some outside force.
Tier 2: The value of these penny stocks dwindle traditionally between one cent to ninety-nine cents. So, investing in them requires advice from experts.
Tier 3: Shares that trade below one penny are known as sub-penny stocks. These are one of the riskiest when it comes to investment. A trader will never find them listed in a reputed exchange. The chance of them making it to the top are diminishing, which tends to zero.
Tier 4: These penny stocks are also known as triple zero stocks. Their price range is the least. The per-share rate is between 0.0001 to 0.0009 cents. Thus, they are almost negligible. The alerts traders receive regarding hot penny stocks are for them. Investing in them is akin to losing all funds. They come with no guarantee.
How to find good penny stocks?
As mentioned earlier, investment in penny stocks come with a substantial amount of risks. Several of these companies are extremely volatile and fly by night. So, your investment can get dry within moments. However, if you recognise the trend and work smartly, you can still make money. Here are some ways to find good penny stocks:-
- A company should be making money. So, if you find any penny stock doing that, you are an advantage. But if a company is losing money constantly, then take it as a red flag.
- Any penny stock with substantial cash, assets, and enough liquidity to remain in the market makes for a better investment for traders. They can appease creditors.
- Any penny stock that has prospects of strategies, and successful products, investment in such penny stocks can garner better results for investments. if you see the company’s intention trying to offer dividends or pay back its investors, then you can take a chance to invest there.
PS: It may be incredibly taxing on an investor to find such penny stocks. Determining them is difficult. Looking at the promising outlook is essential for traders. Penny stock investors should be wary about it.
Use scanners for finding penny stocks
Different scanners or stock screeners are utilised to zero in on the best available penny stocks, or day trading penny stocks and narrow it or filter it. Thus, through the application of filters, you can chalk out your favourite penny stocks for trading in the financial market. Famous filters focus on price, chart patterns, volumes, volatility etc.
Here are some top parameters:-
Float:- These are the number of shares available in the market for investors. It is found out by calculating leaving aside shares offered to insiders, a company’s stock ownership plan, and shares held by employees. Ideally, the float should remain below 100 million shares. However, if it is 50 million, it is considered better. Many penny stocks provide that situation for traders. Remember, when there are a few shares for selling and more buyers, it could trigger penny stocks to rise and make the transaction worthful for you. You can earn exponential money.
High relative volume:- It is an indicator that guides an investor to know about parameters on which the past volumes get compared by the current ones. So, it slides an idea of how much can you work on that penny stock for your benefit. The relative volume is directly proportional to the number of traders trading or watching it. Thus, you may garner great liquidity to target the stock and convert them into huge gains.
Breaking news:-Looking at the news and reading them is one of the best ways to know how penny stocks are going to work or how to invest in them. Do not buy shares that are all inflated and nothing substantial.
If you want to initiate penny stock trading, then you got to keep several aspects in mind. It is unlike normal stock market trading. Penny stocks trade differently from blue-chip shares. They are highly risky and pose a threat to wipe off all your money. However, if you choose good brokers like PrimeFin, TradedWell, you’ll get a better result while trading with them. Moreover, you should sell penny stocks as soon as their price rise.