Can You Make Money with Penny Stocks?

Sep 15, 2020 03:07 AM ET
Can You Make Money with Penny Stocks?

Penny Stocks Explained

Penny Stocks refer to those stocks with a price of less than $5. They are very likely stocks of companies that are experiencing financially negative times. Penny stocks are mostly regarded as speculative and have low liquidity throughout global markets. These usually fall into the microcap category of stocks. 

How to Select the Right Penny Stock?

If chosen correctly, penny stocks can be a profit generator for any investor. However, if you are an investor, you have to consider various factors that are integral to predicting the nature of a certain penny stock. Some of the key factors to be taken into account while selecting the right penny stock are as follows. 

Selecting the Right Stock

First and foremost, you must conduct a certain amount of due diligence before you think of investing in a penny stock. After preparing a short-list of company stocks, you should go ahead and check the company fundamentals of each of the options. This means looking at the underlying fundamental factors such as its level of debt, buyout potential, and cash flow. Compare these to any potential gains you might generate. In other words, investors should be aware of why a particular stock is trading at a low penny stock level. 

Timing Factor

Next, you should understand the timeframe in which you must hold the stock to reap the maximum benefits. You must decide whether it’s going to be a short-term or long-term hold. You can encounter stocks that might be having a successful progress period for a longer time. You might find others in a significantly volatile condition, where you must time the stock more specifically if you hope to reap the benefits.  You should also be aware of when exactly your penny stocks make most of their moves. Price action and volume surges usually occur at the beginning and the ending of a trading day. 

Professionally Managed

Look for stocks that are professionally managed. If a stock has an experienced and ethical management team behind it, the team will have a vested interest in the company. This can give you an increased sense of security. 

Industries That Are Trending

Look for penny stocks in industries that offer binary outcomes for their companies. In such companies, you should take advantage especially when there are prevailing conditions that make the particular commodity or industry in demand. For instance, during the ongoing COVID 19 pandemic, you can search companies who are either engaged with the treatment of the virus or those associated with the medicines required. You can even go for companies that are benefiting from this massive shift in our working lifestyle. This includes companies engaged in streaming services, virtual workout providers, and telework enablers. 

Trading penny stocks - Some Strategies

You can get the maximum profits generated from penny stocks if you are a day trader or a swing trader. In both the approaches, small gains build up over time, becoming a large portfolio. However, you will be surprised if you think you can do this without a proper strategy, as without it you can incur consistent losses instead of gains. Luckily there are certain strategies that you can follow. 

Trading penny stocks

Gather Knowledge

Whether you trade short or long-term, knowledge will always be your main tool as a trader. As a day trader, you must stay updated with the latest market news, individual company news, and government actions that can impact the market. 

Organize Your Day Accordingly

If you want to be a successful penny stock day trader, you need time and effort. This would require you to get to work and plan your strategy in advance before you begin your trading session. Before beginning, you should make a list of penny stocks you can buy. The hour after the markets close should be spent by analyzing what went wrong for your unsuccessful trades during the day. Trading is an ongoing process and will help you get the feel for current events and market sentiments. 

Allocate Some Money for Your Losses

Day trading penny stocks require proper portfolio allocation on your part to keep risks at a minimum. If you execute smaller trades, your losses will be kept at a minimum, protecting your portfolio from negative trades. The trade size also depends on the risk and the portfolio size you have. 

Always Try to Use Limit Orders

If you are a busy day trader, you may have many simultaneous trades at any given time. By using a limit order, you can purchase and sell at your preferred prices when you don’t have time to monitor certain stocks. For instance, if you state that $200 is going to be the limit of your loss, stick with it. Set a limit order to sell at the equivalent price to get a $200 loss.

Examples of Successful Penny Stocks

There have been several success stories that can be attributed to penny stocks. The following come to mind instantly: 

Apple Inc.

Apple Inc

Apple which is one of the largest technology companies in the world was classified as a penny stock back in the early 2000s when each share traded for under 80 cents per share. In 2020 Apple’s share is worth $112.82.

Amazon Inc.

Amazon

Amazon launched its IPO back in 1997. It was classified as a penny stock as it was trading for under two dollars. What was once a gamble for many investors has now transformed into one of the largest companies today, with its share price $3149.84 per share in 2020.

Ford

Ford

Ford is a peculiar case, as it is a multibillion-dollar company but still has shares that are worth $7.03 per share in 2020. While this puts it in the category of penny stocks, it is still one of the most famous automobile manufacturers in the world.

Conclusion

One of the reasons why penny stocks attract investors is because of the explosive moves they make. There have been many instances where investors generated multiple times returns in a few months of investing in penny stocks. Additionally, investors are able to buy a large quantity of these stocks because of their low market price. However, the potential for great returns depends on how one is able to pick a good penny stock.


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