Penny stocks are the small company’s low priced risky stocks that are traded in the stock market. Although small and penny, these stocks are the most risky stocks compared to other category stocks. Penny stock companies have small scale business with constraints on its expansion and also an uncertain future ahead. The investors don’t feel like investing much into a lesser growth story stocks and take much of a risk factor.
These are risky trade for investor and also for the traders. Due to lower capitalization and not much known to general public, they are thinly traded stocks. There is even a risk for trader of not getting his holding at a particular time. Lower trading volumes make the operators easy to make huge price fluctuations in the stock, which can endanger the small investor. The penny stocks are always on the radar of the big buying brokerage houses and operators for scams like pump and dump schemes. They even have the risk of getting de listed from the stock exchange, ruining whole investment of the investor.
In spite lots of risks and dangers, the penny stocks are always in investment radar of both the big and small investors. These penny stocks have a potential to give huge and big returns to the shareholders and that too in very short time. They have ability to get double or even triple in just matter of couple of months. Gambling is a popular and strong instinct in humans and investment or trading in penny stocks is a best example of the same./strategies-to-earn-big-by-successful-penny-stock-trader/ is a good post to read for successful strategies to earn big.
Although it is risky and just like a gamble investing into penny stocks and it is advised to trade on value rather than price. There are few important rules of making good profits from penny stocks. The rules for making money out of penny stocks are as follows:
- Invest only a nominal value: It is advised to only trade with a nominal value into the penny stocks. It is very comforting to invest more or even whole into stock trading at Rs.7.5 per share rather to buy stocks at Rs. 750 per share. There is a common saying “Don’t lay all Eggs into one Basket”. It is strictly applied in case of penny stocks trade as they are a risky proposition. Investor or trader must have a portfolio where only 20%-30% of total investment should be used for penny stock investment. This will diversify the portfolio and minimize the risk factor and hence chances of better return on investment.
- History of Trading Volumes: The penny stocks are low capitalization stocks with very low trading volumes. Majority of the shareholding is with the promoters and they are more often a seller. There are instances where it is very difficult to sell even 200 shares of a particular penny stock. An investor or trader should closely analyze the trading volumes of the stock and make it sure the same need to be consistent. For example: 10 lacs shares traded on the 1st day of trading week, followed by no share traded on rest days of the week. The average volumes will say it is 2 lacs shares per day but the picture is quite different. It lacks consistency. The trading volumes need to be consistent for enable easy buying and selling of a stock.
- The myth “It can’t go any lower than this”: It is very easy to trade a low priced stock compared to a high priced blue chip stock. There is a many common myth when it comes to trading penny stock. The most common is “it can’t go any lower than this”. But the true thing is these penny stocks can go as much lower as possible. Even can go to decimals or even get de listed. People believe in myth rather than the true story of the stock. The stock must be analyzed with fundamental or technical analysis rather than believing in myths. A stock on a downtrend will always be a negative on both technical and for some reason can be negative due to its fundamentals. Stock market especially the penny stock trade should be based on both fundamental and technical analyses rather than artificial beliefs and myths.
- Biased Recommendations: The penny stocks are more prone to scams and frauds. There are many biased, false and misleading statements and recommendation regarding penny stocks. These all are done mostly by big brokerage firms, operators to befool small investor and make easy money out of it. Even the promoters by some fake press releases get involved into scams; artificially inculcating to buy their stocks, trapping the small investors. Small Investors are advised to stay away or ignore the fake news especially the free newsletters. The choice of the stock must be on the basis of fundamental or technical analysis to make good money.