The term penny stocks trading bring a lot of excitement traders not only because of their cheap prices, but also because of the opportunities that it presents to investors. However, the meaning of the term penny stock is very ambiguous but the widely accepted one is the low price, speculative securities for very small companies. In short, penny stocks refer to shares that sell for less than one dollar.
Many traders who are attracted to penny stock do so not because of the not the long term investment potential that they hold but the prospects of the big gains that the stock can bring. There are some instances where penny stock has grown by over 100% in less than one week. However, not all penny stock traders are short time investors. This is because, there are some speculative investors who buy penny stocks with a long term aspiration that these small companies will one day grow into giants. In the last 10 years, there are records of penny stocks increasing to over $20 but on the other hand, there are many more stories of these stocks falling below half of their current value in less than 24 hours. It is for these reasons that we have come up with Penny Stock Trading tips to help you mitigate the risks while at the same time increasing chances of being profitable.
Use a fundamental stock screener
People make mistakes when looking for the cheap penny stocks to buy because they use the wrong sources of information. Most of these people go to forums, reviews, and websites and message boards but are not able to find a suitable pick. You can find the best penny stock picks by using an automated screening device.
Moreover, trading apps can also be a fantastic way to enhance your knowledge of trading – just take a look at these robinhood app reviews for instance. Essentially, Robinhood is an online broker that serves US clients and this makes it one of the most popular brokerage firms in the US trading scene. Suppose you want to know more about stock investing. In that case, The Motley Fool vs Morningstar are two of the most popular investment platforms. They provide comprehensive recommendation lists as well as detailed news items. Using this information, investors can determine the potential returns on their investments.
For example, you can use Bing screener which is a fundamental stock screener that filters out companies that are not listed on major stock exchanges. Alternatively, you can use Over the Counter (OTC) markets that has over 10,000 securities listed, most of which are penny stocks. Such a number reveals the opportunities that you miss when you only focus on the big stock exchanges.
With a stock screener, you can filter stocks based on the following:
Intrinsic value
Growth earnings and revenue
Cash flows
Dividends
Take a look at the charts with support and resistance levels
Many people get apprehensive when the topic of analysing penny stocks is brought up. They think that this is a convoluted and subjective topic that should only be left to experts. This can be true for some but not always. If you are new to the technical analysis, it is important to understand the basics such as support and resistance levels.
Support levels. Support level is when the price falls down to a certain level and then back up again. The more this happens at a specific price, the stronger the support level of the stock.
- Resistance levels. Resistance level is where the price goes up to before falling back down again. The top most point where the prices reach before falling again is the resistance level.
After studying the chart for the past six months, consider buying during support and selling at resistance.
Look at the liquidity of the stock
Some penny stocks will trade a hundred shares a day while others hit hundreds of thousands of stocks in a day. To know the amount of money that flows in a day, find the number of stocks traded in the day and multiply that by the value of the shares. Normally, stocks traded on major markets will have a higher liquidity than stocks on pink sheets and bulletin boards.
Highly illiquid stocks that sell in low volume per day may suffer from extreme volatility. Therefore, it is hard to invest large amounts of money on such small stock because it will drive the prices up. On the other hand, it will be hard to sell the stock because there are very few ready buyers. This can also cause the prices to go down.
Avoid penny stocks that jump on high volume
Many people confuse stock moving on a high volume with winning stocks. The worst performing stocks are the ones that jump on price on a high volume. You may think that this only happens on paper but when you do research, you will discover that:
You should buy stocks that went high on price when selling at huge volumes but is currently selling at low volume.
Buy stock that is falling towards the support level. This means that the stock will soon increase in price and then, it will be a good time to sell.
