What are Penny Stocks?
Penny stocks or microcap stocks are defined as companies that are trading below $1 per share. Though these stocks often trade on Pink Sheets, some analysts and the Securities & Exchange Commission (SEC) also consider companies that are trading below $5 on NASDAQ, or other exchanges with a market capitalization between $50 and $300 million are penny stocks.
Investors can buy penny stocks online by using online broker services. Penny stocks can easily be bought at any general public area as these stocks are not necessarily being traded on the stock exchanges. If you are using broker services you must make sure that your online brokerage account provides you with a lot of valuable information so that you can make strong decisions.
A Perfect Strategy for Buying or Shorting Penny Stocks
Penny stocks are normally highly speculative and bear high risk and high reward potential. Investments always come with some risk attached to it; however, investors can reduce these risks by using the right strategies while buying and shorting these stocks. It is also important to know that a successful past performance does not always dictate a prosperous future.
In the history of the stock exchange, many successful companies have started their businesses from the bottom and with very little market capitalization. Success for companies does not come by default; a lot of resources have to be put in. Whenever investors want to invest in penny stocks, it is important for them to investigate the company’s future plans and expectations instead of past performances and financial results.
For instance, if anyone wants to buy a penny stock operating in the oil & gas industry, the person must look into the fundamentals of the oil & gas industry before picking or shorting these stocks. The performances of these stocks are directly correlated with the variation in oil & gas prices. Therefore, a keen eye on oil & gas prices is very crucial to the selling or buying of these stocks.
Similarly, if you are investing in any stock operating in the mining, chemical or retail industry, it is important to look into every detail of these industries before deciding to invest in these companies.
Technical Analysis and Future Forecasting
Technical analysis means that an investor or his advisor must be well versed on the accounting standards and also have the potential to interpret ratios. The company’s valuations are always vital in valuing any stock performance. Furthermore, future forecasting is another important factor for every investor to consider before making any major investment decision.
Pros of Investing in Penny Stocks
Like any other investment, there are several advantages and disadvantages associated with penny stocks. It is vital to first understand the advantages and disadvantages that are involved with investing in penny stocks before deciding to invest in them
- Some investors are usually short on capital and can benefit from investing in penny stocks as they require low capital and have low cost per share.
- Penny stocks do not need to be listed on stock exchange. This makes it easy for anyone to purchase their shares.
- Due to their low price per share, penny stocks enhance investor’s options and allow them to create a portfolio of different stocks from different industries. This reduces investor’s dependence on one industry and risk on any particular stock.
- Penny stocks have the potential to bounce back in a very short period of time amid any optimistic news or report.
- Penny stocks that have strong business models and are also operating in lucrative industries have the potential to become small cap stocks, which could result in huge profits for investors.
Cons of Investing in Penny Stocks
There are many disadvantages that are involved with penny stocks. It’s obvious that when there is a profit making opportunity there is also a chance of losing money in a very short period of time.
- Penny stocks are not necessarily listed on SEC, which clearly means that these companies cannot be publicly scrutinized like those listed on stock exchange.
- Penny stocks have less cash value as banks and other financial institutions do not offer loans on easy terms and condition. This clearly means that these stocks have very little ability to reduce the threat of bankruptcy.
- Lack of enough information on them and a clear track record on how they are expected to behave is a big disadvantage with penny stocks.
- Artificial hype is another disadvantage with penny stocks. Some penny stocks can get fake recommendations by just paying individuals or new agencies.
Penny stocks are not suitable for retirees or defensive investors who are looking for a steady cash flow, dividends and buybacks. However, short-term value investors who have the ability to play with risky investments using money management principles can buy penny stocks. Though traders can buy penny stocks that are trading on Pink Sheets, it is still wise to choose penny stocks that are listed on stock exchanges like NASDAQ and others. Finally, wise traders never use other peoples’ recommendations unless they conduct thorough research on a company before making important decisions.