Penny stocks are becoming increasingly popular among retail investors looking to get potential high returns with limited capital by investing in stocks worth less than $5. Penny stocks are also a great way to diversify investors’ portfolios by investing in small companies. They can be firms in trendy business industries, like the marijuana and biotech sectors, with significant growth potential that hasn’t been fully exploited by investors, or they can also be companies whose disappointing management and negative growth triggered by a share price fall.
Penny stock trader Tim Sykes says that even if penny stocks are high-risk investments, it means that the potential for returns is high if they fit your profile and risk tolerance. Penny stocks have the potential to bring you significant profit quickly if you’re patient and dedicated to finding the right companies to invest in. That said, while Mr Sykes became rich by trading penny stocks, he likes to highlight that penny stocks are not for every trader and that they shouldn’t be seen as a-get-rich scheme.
If you want to get into penny stocks and become successful over time, here are a couple of things you need to take into consideration.
Table of Contents
Know What You’re Doing
You cannot start trading penny stocks if you have no idea how trading works, or if you don’t know what penny stocks are. Therefore, the first thing to be sure of is that you have adequate trading and finance knowledge to trade this market without taking unnecessary risks. Even if it can seem overwhelming, focus on your education – start building your knowledge and keep learning every day.
Understand the Risks
As with any type of investment, trading penny stocks is risky. But this type of stock is risky by nature, as they are illiquid and very volatile. They’re also often traded over the counter and are not regulated. It is also sometimes difficult to find reliable available information about these companies.
Be well Prepared
To trade the most volatile stocks you must be prepared. This means that you need to work on a trading plan to know how you will select penny stocks, which set-ups you will follow to enter and exit the markets, as well as how you will manage your positions. It’s also important to adopt risk and money management rules to better protect your capital.
Understand Why the Price of a Penny Stock is Low
While some penny stocks have a small value because of market risk, others have to bear business risk. If you take the example of penny stocks in the energy sector like Baytex, you know that their value fell because of the fall of energy prices, not because of weak fundamentals. That means that the stock can potentially benefit from a oil price recovery.
Build a Watchlist of Penny Stocks to Monitor
Once you decide how you will find out penny stocks to invest in, you can build an effective watchlist of penny stocks to monitor to quickly pick the best trading opportunities. According to your market approach and your financial goals, you will be able to narrow the list of penny stocks according to relevant criteria.
Final Word
Always remember that most traders fail because they do not invest in their education, and they do not have the right preparation to properly analyze and trade the markets. If you want to become a successful penny stocks trader, be in the right mindset and start your trading journey by following the tips we’ve mentioned above.
