8 Things to Consider When Investing in Penny Stocks - How to Invest in Penny Stocks - 247broadstreet.com


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8 Things to Consider When Investing in

 Penny Stocks


Some years back, penny stocks were stocks that were traded for less than a dollar in a day. However, the term’s definition has evolved with time to include stocks that are traded for less than $5 in a day. Penny stocks lack liquidity and hence they are considered to be highly speculative and high risk investments. They are often traded over the counter through the pink sheets and OTC Bulletin Board. There are literally thousands of penny stocks to choose from and new ones are also listed daily. 





However, if you don’t have any experience investing in this field, there are several things you should first understand before starting the ignition. With that in mind, here are some of the things you need to know before investing in penny stocks.


1…Do some basic research

This is the first thing that should cross your mind before investing in penny stock. You need to give the company at hand a quick Google search. If Google will not answer all the questions, get out and do some quick research in the market to determine whether this stock is worth your time. If things are a bit hidden and it is difficult to get any information about the company, this could be a bad sign. Start by doing some basic research about the company. 





2…Though penny stocks are risky, they also have great growth potentials

Penny stocks are highly volatile and hence they only act a good prey to day traders, and short-sellers. They run the risk of collapsing because of their low value, lack of stability and market cap. In fact there is a reason why these companies are in penny stocks and instability is one of them. On the other hand, if you are not so sensitive to the risk, you can invest some good money in penny stock because they pose great growth potentials. It is a risky and a reward dynamic that is just for those who can face the risk of loss. 





3…Not all penny stocks are bad

One thing to bear in mind is that penny stocks have few fundamentals. They have little to know revenues and little to know profits. Though, what most of the people don’t know is that some of them don’t even involve huge losses. If researched and invested on to the right company, you can be guaranteed of the profits. I think that is the reason why they are traded for just few dollars. They are highly risky as many people say but at the same time they can reward you handsomely. 





4…Do not Act on tips, rumours, spam emails and free recommendations on penny stocks

Some people lose money when investing in penny stocks and think that the entire blame should land on them. In some cases, people are misled to invest in sham companies. Avoid jumping to invest because you got an investment tip from a friend on Facebook. Most of them don’t even weigh the risk of loss before acting. Most of spam emails are focused at misleading you, avoid those messages when investing. Act on your own and if possible do your own research before listening to what people have to say. 





5…Penny stocks can be prone to scams

Investing in penny stock is prone to scammers especially those promoted by marketers in the internet. However, once the appropriate knowledge is gained, penny stock scams are no longer something to worry about. The most common spams are the pump and dump / Dump and pump scams. These scams are created by professional marketers out there. Most of the marketers work independently or work for or with micro-cap or nano cap stock companies. You need to first get enough information on how to identify the most common penny stock scams. After that, you will act safe and avoid getting conned





6…Don’t risk a large amount of money on penny stocks

A word of advice is that you should be extra careful with position sizing. You shouldn’t trade more than 10 percent of the daily volume. I bet you are not ready to lose a lot of money. Although the amount of money you invest determines the amount of profit you make in case of a blessing, it also determines the amount of money you can possibly lose when the devil strike. What this means is that you should be ready to invest what you can afford to lose. 





7…Go for stocks with good liquidity and profit making companies with solid cash flows

As we already established, there is a reason why a company is in penny stocks. One of the reasons is that they don’t have enough guarantees of stability and liquidity. However, some other companies are in penny stocks to raise money genuinely. What this means is that the company you intend to invest your money in can determine your profitability and the degree of uncertainty. Therefore, invest in a company with good liquidity and solid cash flows.




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8…Penny stocks can as well provide an opportunity for small investors to buy shares in a promising company

There are several genuine and stable companies out there trading penny stocks. They have rock-solid financial positions, proven management teams, improving financial ratios and a growing financial ratio. They are determined to dominate an industry and hence you can end up getting your life long investment here. You may end up buying shares in one of these type of companies and build your wealth with time.



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There are different sides of a penny stock, the beautiful and the ugly side. The beautiful side will give you huge returns and the ugly side will give you uncountable losses. The spectrum of investing in penny stocks ranges from life-long wealth, massive profits to lost investments, illegal activities, scams and bankrupt companies. Consequently, you will have to make smart decisions regarding your investments and you may end up a millionaire. If you make otherwise decisions, you may end up poorer than you began. Get started but be smart.










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