Before beginning
to provide readers with tips and tricks of investing in penny stocks, it is
prudent to properly enlighten people about what a penny stock is. A penny stock
is basically a stock of any company that is being traded under $5 per share.
This is the definition given by the Securities and Exchange Commission (SEC).
As such, there are a few that believe that penny stocks are those which are
traded under $3 and some others who believe that the stocks traded under $1 are
considered penny stocks. The generally idea is that the stock prices are
extremely small and investors are given the chance to buyout hundreds if not
thousands and sometimes even millions of these stocks of companies that are not
yet listed on any exchange but are on pink slips. They make for a high risk
sometimes high profit investment which is very short term in nature. By saying
short term, it is meant that these investments life-spans rarely exceed 24
hours and most of them are through in a matter of minutes. These stocks are generally
ideal for those who have taken care of their long term needs and investments
and have some liquid risk money on hand. Although rare, these stocks have been
known to give out massive payoffs sometimes with returns of more than 1000%.
These cases however, are very rare and generally they make for a moderate
profit if invested and timed correctly.
Investors would
do well to keep in mind the following tips while making an investment in penny
stocks:
·
Research on company: In depth research
of the company whose stocks are being purchased is one of the most important
things that are to be carried out. This provides people with tangible
information about the fate of the stock, its rise and/or fall and so on.
Knowing the financial background and position of the company also helps
investors in making sure that their investments are not wasted on dying stocks
and the company’s they are investing in do not harm their portfolio.
·
Research of market and company liquidity:
This is perhaps the only yardstick that can be used to measure the integrity of
the investment and the accruing returns or losses. Because of the high risk
involved in investing in these unlisted companies, people should find out the
financial and liquid position of the company, its debts and the market
position. This will give them an idea of the payout or loss entailing the
investment.
·
Buying the right Stock: It is advisable
for people to buy low priced stocks of companies with good intrinsic value. As
such, this builds the liquidity of the company and acts as a safeguard against
losses to the investor due to insolvency. The stronger the liquidity of the
company, the better the chances of profits and lower the risk of losses due to
insolvency of going under.
·
Splitting the investment Capital: Splitting
the investment capital to invest in two or more companies of different kinds
can ensure a bit of stability in the returns on the investment. As such, while
waiting for the stock to skyrocket, people can make a series of stable and
moderate profits through this principle.
·
Choosing the right broker:
Although most penny stocks are dealt only through online brokers, there are a
few that are dealt on exchanges. It is therefore important that people find the
right broker in order to secure their investment. Unfortunately there are
various brokers and parties that defraud people by advising their customers to
invest in companies that have been pumped to a very large extent. Just before
the bubble bursts, the brokers pull out their stake and they also charge a
hefty fee from the customers and then abandon them. The damage caused can be
catastrophic in nature.
·
Focus on short term trading: Penny
stocks are excellent for all those who want to indulge in short time
investments with a little risk money. As such, they are not ideal as long term
investments as their security and stability cannot be guaranteed in any way.
People are advised again to fulfill their long term commitments before they
invest in these stocks.
·
Choosing the right stocks: Choosing the
right stocks is basically a combination of finding reliable and correct
information about the company, the liquidity and the market. People would do
well to invest in high volume stocks with good liquidity as these are the
stocks that can provide optimum results.
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