The stock market can be a great place to invest money for your future. A lesser-known and higher-risk option for people looking for an exciting investment challenge is to try your hand at trading penny stocks.
These stocks are priced below $5 per share, sometimes even less than $1, and can produce quite an impressive return, when traded the smart way. If you are looking to get into the market with less capital this could be the way to go, as long as you’re willing to put in your research. Let’s explore some tips on how to trade penny stocks below.
- Find a reputable broker: Penny stock trading carries a very high risk and it’s necessary to have someone in your corner who knows what they are doing. You also want to make sure your funds are protected. If you choose to trade online make sure the site is certified and has a positive, traceable history. Similarly, if you hire an individual or firm, ask for references that will verify their trustworthiness, and preferably a track record of financial successes for their clients.
- Trade within your financial means: Even though you may be able to purchase several more shares of a penny stock compared to their higher-priced blue chip counterparts, you still need to invest based on what you can afford. Because of the higher risk involved it is important to plan for a financial loss and ensure your bank accounts can handle such a hit. Continue to keep your total portfolio diversified; don’t put all of your eggs in one basket, as they say.
- Research the companies before you buy: It may be difficult to find a lot of information about some of the companies you can buy shares from. This is for a few reasons: they are just starting up, perhaps they’re more obscure and less documented—both of which could lead to a lack of documented financial history. But continue to do your due diligence and find out any information you can before you buy. If you don’t feel good about the company, simply move on.
- Avoid questionable buys or companies: If any red flags pop up it is recommended to “walk” away from the trade. Companies will advertise their stock for sale just to make a profit for themselves. If it seems too good to be true it probably is. Seek out professional assistance if something doesn’t seem right.
- Closely monitor the stock’s performance: Unlike some other investments, penny stocks don’t tend to be long-term; you stand to gain the most through buying and selling quickly. Based on this it is important to continually watch the performance of the stock and the price per share. If you’ve made a good return on something, don’t wait around for it to get even better. Take your success and move on. If you are unable to keep a close eye, hire someone that can—they may be an invaluable resource and help keep your money safe.
Do you have penny stocks in your financial portfolio? How well have they performed?