Investors should access and evaluate as much information as they can about a company before buying any stock. This holds true especially for penny stocks issued by the smallest companies in the market. First off, it’s critical to educate yourself on trading penny stocks before you jump into the market. The methods of trading penny stocks do not vary widely from trading in higher-valued companies. Just as in traditional stock trading, the goal with penny stocks is to buy low and sell high. The best way to accomplish this is by doing fundamental and technical analysis and getting educated on the companies in which you invest. When considering a potential company to invest in, it’s important to see growth.
Research its corporate earnings, profit margins and the share price. If there are company filings with the SEC, that’s a great place to start.
Stuart Titus, CEO of Medical Marijuana, says, “The SEC requires public companies to report earnings and maintain current investor filings. These public documents allow investors to get an idea of company business, key personnel, operations, revenue or other information that may lead to future investor value.
“For example, a startup biotech firm is developing a medicine or drug but does not have current revenues. In the future, the drug may have a broad market appeal to the medical community. Thus, investors may place value for the company based on future operations from the drug development process. Investors can keep apprised of company activities via these public filings.”
Dig into the company’s financial history – if there are no SEC filings, get in touch with your broker to see if they can provide any information about the company. Understanding the company’s anatomy is crucial in guiding an investor to the appropriate buying and selling point. The more analysis completed up front, the better you’ll be able to make an intelligent purchase and manage the volatility of the stock.
If you are new to penny stock trading or want to develop a new trading strategy for your portfolio, building knowledge is a fundamental step. A great way for beginners to trade in the penny stock market is to first get comfortable trading in simulation accounts, otherwise known as paper trading.
This method is the safest way to practice trading penny stocks without the risk of losing any real money. By becoming familiar with price fluctuation patterns and reflecting back on the mistakes you made while using a mock account, you can use this tool to learn the ins and outs of winning and losing in this market.
How much money you need to start trading penny stocks really depends on your current financial situation. A rule of thumb is the money you use for investing should not need to be accessed within the next five years. You have to answer this question: What type of return am I looking for? The more you invest in the market, the higher rate of potential return. You can start with $1 to $10,000 – it all depends on your level of risk tolerance.
Sykes adds, “You could start with nothing. The key is learning about penny stocks first. It’s not about how good or bad of a company it is. It’s all about seeing if this stock can have momentum.”
Most people want to invest in good companies for the long term, he says.
“You have to separate yourself. In penny stocks, you cannot fall in love with the company. You can not fall in love with the technology. You are simply trading a volatile asset. It takes a lot of discipline to learn. You really have to understand how penny stocks are different,” Sykes says.
Balance Your Risks to Reap Rewards
Despite the riskiness of penny stocks, there are penny stock traders who have made significant profits. The key to safe trading in the penny stock world is developing strategies according to your risk tolerance that will benefit you in a high-risk environment. Always take precautionary steps to educate yourself on the company using the instrumental tools and financial filings available.
If you take the proper steps to understand the ebbs and flows of the penny stock market, trading penny stocks can offer exposure to a unique market.