Can You Make Money on Penny Stocks?
Penny stocks can be enticing if you don’t have much money to trade. However, these stocks can be inherently risky; they are generally tied to very small businesses that are, as yet, unproven.
Like any especially volatile investment, you will need to start small and learn as you invest.
Watch OTC Markets
Penny stocks cannot be purchased from large exchanges, such as the New York Stock Exchange or the NASDAQ. Because they’re not watched closely by the pundits and governors of these large exchanges, they can be risky trades. You will need to buy these stocks from OTC markets.
The companies that are selling cheap stocks are generally unproven. If you’ve been following a particular industry or a specific leadership team, you may find that getting in early can lead to huge gains.
However, you can also get sucked into a pump and dump scheme. These schemes release inaccurate information about a company to create a run-up in stock value before selling and crashing the stock value. Make sure your information is reliable before you go all-in on any such stock.
Company Characteristics to Look For
You can find companies trading their stocks in the penny range on the breaking news information scroll. If a company has a new product offering that is taking off, or if what they are selling is suddenly seen as the ultimate answer to Problem X, put some money into the stock before it peaks.
Avoid companies that generate publicity from a buyout or a large change in leadership. Track the number of shares that are actually available for trading; if you find a company with fewer than 50 million shares, buy early so you can own more of it before the value of these 50 million shares takes off.
Make sure you are also noting the relative volume of shares being traded. A greater volume of trades means the company is gaining traction and visibility; owning before the run-up peaks is a great way to make money on these stocks.
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Increase Your Volatility Tolerance
Cheaper stocks are not ideal for folks who love the idea of buy and hold. According to the experts at Money Morning, “Penny stocks thrive on volatility.” Such stocks need to move to grow in value.
Because these stocks are cheap, boosting your volatility tolerance with these investment tools can allow you to stretch your volatility tolerance. Keep an eye on tech stocks, societal trends, and industries that have been forced into growth by recent world events. If you have to have access to more stable investments, even in such stocks, consider investing in companies that are still mining gold!
Investing is always a risk. These stocks allow you to invest in small companies that are as yet unproven. If you notice a lot of hype around any penny stock, make sure you know where that information is coming from. Unreliable information on the value of any stock can lead to artificial inflation in value, which will eventually crash and wipe out the value of your stock.