4 Methods for Trading Penny Stocks

by Susan Paige on September 20, 2018 · 0 comments

Stocks that have a low value, usually less than $5 per share, are known as penny stocks. The fantasy of most people who trade penny stocks is to purchase stocks for under 10 cents a share and then turn around and sell them for more than $30 a share. This, of course, would lead to a hefty profit, but it rarely plays out this way. Ideally, you’ll want to strive for a five to seven percent return on your investments. Having this goal is an excellent way to mitigate losses. Here’s a look at four need-to-know tips for trading penny stocks.

More Doesn’t Always Mean More

Image via Flickr by slgckgc

Just because you own thousands of a certain stock doesn’t mean you’re rich. In fact, if you buy 1,000 shares at 50 cents a share, this only totals a value of $500. You need to be more concerned with the number of shares outstanding than the number of shares you own. Market capitalization plays a significant role in how well you’ll come out on top when you invest in penny stocks. The number of shares available greatly reflects how prized the shares are, and you need to consider this number before you invest.

Don’t Forget About Dilution

Dilution is going to influence the value of the stocks you invest in. Employee stock options often cause the number of shares outstanding to increase tremendously in an attempt to raise capital. When this happens, though, this attenuates the ownership percentage that is held by non-employee investors. 

Any time you notice a company issuing extra shares, there’s a good chance it’s doing so to raise capital. However, since the company hasn’t actually increased in value, the share price then drops in value. Avoid investing in this type of company; choose companies that have a persistent hold on their share structures. 

Learn How to Pinpoint Winners

Many companies that have penny stocks for trade have a moderately small market capitalization, but this isn’t always the case. By looking at the fundamentals of these companies and, more importantly, the strength of the fundamentals, it becomes possible to pinpoint penny stocks worth investing in. Does the company have a strong infrastructure that enables it to currently turn a profit without any further need for raising capital? How does the company compete in its sector? As you do your homework, you’ll be able to pinpoint winners.

Know Your Sectors

Some sectors are well-known for having stocks that trade in pennies, like the mining sector. Companies operating in this sector will often issue new shares because they need money to fund their operations. As you research different sectors, you’ll become better at knowing which ones are worth investing in. 

You’re probably not going to become a millionaire overnight by trading in penny stocks. Many have gone before you, though, and provide great footsteps to follow in. Make sure to research these people and learn from their successes and mistakes. Combining what you learn with the tips mentioned earlier is a great starting point for finding your own success as a penny stock trader.

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