Author: Eduardo Montero
Last Updated on March 30, 2022
Stocks which is valued at GBP 1 or USD 1 or less can be called as penny stock. Standing outside the circle, penny stock trading might sound very simple. All you need is a small amount of money with which you can buy a significant amount of shares and when you see the prices rising, sell the shares and take the profit.
Hang on, Unfortunately most of the penny stock don’t work this way.
1. In my honest opinion, It is always to better to keep yourself away from the penny stocks. But wait, if you think this is the best way to make profit or you are not financially stable to invest in big companies, then there is a strategy to follow for investments in penny shares. In today’s world, there are lots of new corporation emerging everyday and many decide to go public.
2. The decision made by the companies to go public is mainly to increase their investment and share value. No matter what is the intention of the companies, investors must be vigilant in making their decision. These companies are mostly unstable as they are brand new in the market.
3. Annual and quarterly statments won’t be availble due to the new emergence of the company and so this itself is a big as you are going for a stock about which you have no idea.
4. Next best thing would be to get some reputation from shareholders. If you find some shareholder desperate to sell off the share, that would be a clear indication that the company is not doing well. Or sometimes the existing shareholders might simply encourage you to buy the share just to increase the share value and sell off their share at the right time. You might end up being dumped with useless shares.
5. Most the companies with penny stocks lose money through incompetence in management. So its very important analyze who is managing the company and the way it is done. One more thing is to monitor the way the investor’s money is spent.
6. Read the newsletter published by the company. Important thing to note is “How the distribute the profit”. As cash or shares. You must ask yourself whether is it really worth to take profit in the form of shares? Sometimes it is and sometimes its not. It depends on the situation and the market. Sometimes distribution of shares is just to dump the shares on investors.
7. Make a careful analysis whether the company is paying IR professional money to get listed in the exchange. If it is listed by paying, then you must exercise caution. Sometimes its good to avoid this factor by considering IR professional money as advertisement if company is reputed.
8. So don’t just give up the stock just for the above mentioned reason as you might be missing the best stock of your lifetime. Pay attention the movement of the share.
9. If you are considering being a part of a company by buying shares, then make a careful note of the recent news and its improvement, otherwise you might end up as the last one to hold the share whilst other have left the company.
10. Next thing to consider is the performance of the company. Were they really efficient in bringing the product to the market on time. Did they make right decisions on right time? Did they win the investors confidence?
11. The most attractive concept of penny share is that you need a very small capital. Imagine how many shares can you buy with GBP 3000 which is worth GBP 0.10 per share. Even a small increase in price will increase your profit. But you must remember, loss happens the same way. So its necessary to more vigilant while trading penny stocks.
12. Once you had started making profit, naturally your next step will be to increase your investment. You must go through the cycle once again. If you think the profit you earned has earned some reputation for the company, its better to increase the investment because nothing matches the experience. But from now on you must have an exit strategy as you know the movement of the stock and the behaviour of the shares with annnouncement of news.
13. Penny stocks are available in all the industries like oil and gas, mining and banks. Choose the one which suits you. Its always better to choose the industry about which you know well, which would make your trading experience smooth.
Author: Eduardo Montero
I'm Eduardo Montero. Computer scientist by profession and passionate about online trading with more than 10 years of experience in the financial markets. I'm the author of hundreds of articles published in other websites about the online trading industry. Learn more about me here: About the author.