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Penny stocks are defined by the Securities and Exchange Commission as shares issued by small or micro-cap companies for any amount below $5 per share. They are designed for investors who can withstand a high level of risk as the low price point is a tell-tale sign of bigger issues going on within the company.
Getting Started with Penny Stocks
Step 1: Do Your Due Diligence
Do a due diligence background check into the company before buying the stocks. And then you can give “paper trading” to get acclimated with buying and selling shares. It won’t cost you a dime and will give you a bit more time to decide if you want to move forward with investing in that particular company or penny stocks altogether. You should also consider reaching out to a seasoned penny stock trader for guidance. They can serve as your mentor and help you avoid some of the same mistakes they made early on.
Step 2: Decide How Much You Want to Invest
Penny stocks are volatile and “investors in penny stock should be prepared for the possibility that they may lose their whole investment. While considering the volatility of the industry the company is in. It is advisable to only put an amount on that won’t tear apart your finances if you lose your investment.
Step 3: Start Trading
Having done your due diligence and made the decision to invest based on the merits of your own research, then you can start investing in penny stocks. Even if you’ve done some paper trading, it’s best to start off slow with a small amount and buy more shares once you’re comfortable.
When selecting an online broker, you’ll want to be aware of their fee structure, trade surcharges, volume restrictions, and trading restrictions. Broker fees can cut into your profits so it’s important to choose the right one.
Risks you should be aware of before diving into Penny stocks trading:
Exchanges
If the shares aren’t listed on a major exchange, proceed with caution as the regulations are little to non-existent.
Scams
Be on the lookout for scam artists that promise to make you wealthy from trading penny stocks overnight. They do this by promoting a particular penny stock heavily or issuing warnings that a particular penny stock should be avoided at all costs.
Return on investment
When trading penny stocks, there’s no guarantee that you’ll turn a profit. You have to think about the time between the purchase of shares and when the penny stock price appreciates and if it’s worth the wait.
Trade Volume and Fees
The trading volume for penny stocks is relatively low because of their risky nature, so you may find it difficult to buy and sell at the most optimal times. You also want to pay attention to the fees that brokers sometimes tack on to penny stock trades.
