Low-priced penny stocks have obvious appeal for new traders. If you want to purchase several stocks with a small amount of money, penny stocks are certainly one way to do so. However, you want to understand the inherent risks with penny stocks. Know what you’re getting into before you jump into penny stocks so that you’re set for the best chance of success even as a beginner.
What Are Penny Stocks?
According to the U.S. Securities and Exchange Commission (SEC), a penny stock is a security issued by a microcap or small-cap company that trades for less than $5 a share. Some financial professionals prefer to classify penny stocks as those that trade for no more than $1 per share. Penny stocks are popular because of their accessibility for new traders who have limited funds.
While penny stocks are undeniably affordable, they’re not without their drawbacks. In many cases, the companies that are selling penny stocks are doing so at such a low price point because the companies themselves are financially unstable. These businesses may be nearing bankruptcy. They often have little to no financial history for potential investors to evaluate.
Choosing Your Penny Stocks
Penny stocks are highly volatile, and you want to choose penny stocks within an industry with which you’re familiar. Shares in penny stocks can fall or rise as much as 50 percent in a single day. If you’re highly informed about the company or sector, you’ll have a better feel for which direction these stocks will move in. This familiarity may help to minimize your risk somewhat, although traders should recognize that penny stocks are always high-risk stocks.
Paper Trading for Penny Stocks
Before you begin trading real money in penny stocks, do some paper trading in these stocks. Paper trading is the process of using a pen and paper to record imaginary purchases and sales. Give yourself a limited portfolio of money in line with what you can actually afford to invest in these stocks. Spend a few weeks making paper trades to see what type of profits you’ll pull in.
Your paper trading ventures will help you familiarize yourself with the market and get accustomed to the proper terminology as well as the layout of the sites that you’re interested in using for trading. After paper trading for a period of time, you may have a better feel for how much you would want to invest in penny stocks.
Where to Trade Real Penny Stocks
You’ll need to do some research to find a reliable place to trade penny stocks. As a rule of thumb, you should stay with Nasdaq, the American Stock Exchange, and the New York Stock Exchange. However, these markets have strict requirements for the companies they list. This requirement often excludes some of the less reliable businesses that are more likely to offer penny stocks. Prepare to dedicate time to discovering reliable and worthwhile penny stocks.
Beginners in penny stocks should be careful with their investments, even when they’re putting only a small amount in. With a practiced approach, however, you may find a few opportunities for profit with penny stocks.