Penny/Low Cost Stocks
How To Invest In Penny Stocks
You may have heard of penny stocks from the movie ‘The Wolf of Wall Street’ and wondered just what they are. To put it simply, penny stocks, AKA microcap stocks, are the cheapest of all shares available on the stock market.
These stocks often don’t sell for more than a handful of dollars, and since they are cheap, they are often written off as worthless. However, this isn’t the case, and while there are risks associated with buying these stocks, they can still make a valuable asset for your portfolio. Turning a profit with these stocks requires a strategy and a lot of patience, but it can be done.
In this article, we will be sharing some top tips for investing in penny stocks, and telling you how you can get started and buy your first one.
How Can I Invest In Penny Stocks
If you are interested in starting a portfolio and buying penny stocks, then you will need to follow some basic steps, and understand a few things about how these stocks work.
When investing in any kind of stock or cryptocurrency, it is important to always manage your expectations. While things could potentially work out very well for you, they could always go wrong as well.
As such, it is important to not expect to get rich overnight and to never invest more than you can afford to lose. Not that that will be an issue with penny stock, so without further ado, here are the basic steps required to invest in penny stocks.
Find A Good Brokerage Company.
The first step when it comes to buying and selling any kind of stock is finding a brokerage company to work with. Brokerage companies are businesses that allow you to buy and sell stocks on the market, and there are lots of great ones to consider if you are a complete beginner.
You will want to find a brokerage company that will make buying lots of penny stocks simple and straightforward. Many companies will charge surcharges on stocks below a set value, and you want to avoid these if at all possible.
As such, look for brokers that don’t charge extra fees when dealing with penny stocks, so you can maximize any profits you can gain from trading them. We will cover some good brokerage companies for buying and selling penny stocks later on in this
Be Aware Of The Risks
Dealing with penny stocks is far from risk-free, and it will be important to be aware of what you are getting into. Institutional investors, money managers and many other traders are actually prohibited from buying or selling these stocks, which means they can struggle to build up a significant following.
Their value is also highly liquid, and can change radically overnight, meaning that you rarely want to hold onto penny stocks for very long. When dealing with these micro cap stocks, you will be acting as more a spectator than an investor.
Spectators buy stocks in the hopes of selling them to make a quick profit, which is the only viable approach when selling penny stocks. Investors buy assets with the intention of holding onto them for a long time to wait for their value to appreciate value.
Since most penny stocks will become valueless over time, you can ‘t really hold them in your portfolio as a long term investment. If you make some money on the penny stocks, then you can save up to buy better long-term assets.
Beware Scams
As we said in the last section, many major investors are legally prohibited from buying or selling penny stocks. This leads to these stocks being less regulated than more valuable shares, and as such you will need to be on the lookout for scams.
Often, penny stocks will provide very little information on the company they are affiliated with. You should always try to do as much research as possible to find out where your stock is coming from, and if it is legitimate or not.
There are two common scams you might encounter with penny stocks and knowing what they are will help you to avoid them.
Pump & Dump Scams
A pump and dump scam is when a company hypes up a stock through an advertisement campaign or a newsletter. This causes lots of buyers to invest in the stock, raising its value considerably.
Once the value has increased sufficiently, the company in charge of the stock sells all of their shares for a profit, leaving the investors with nothing in return.
To avoid pump and dumps, be aware of how hyped up a particular stock is before investing in it. Often, if it looks too good to be true, then it probably is.
Short & Distort
This is the opposite of a pump and dump scam, and involves a company betting against their own stock, or shorting it. Shorting is when an investor or stockholders bets that a particular asset will fall in value. In order to make their bet a reality, companies using a short and distort scam will deliberately bad mouth their own company, saying negative things to decrease the stock's value.
Both of these scams emphasize the necessity of proper research when buying penny stocks. You want to look for assets that offer a viable investment, from companies that are serious about their business.
Diversify
Common advice given to potential investors who want to start buying and selling stocks is start small and work your way up. Penny stocks are among the smallest assets you can buy and as such make a great starting place for first time investors.
However, another good piece of advice is to not put all of your eggs in one basket. You don’t want to buy up too many penny stocks at once, and eventually you will want them to make up only 10% of your portfolio. Always set funds aside for larger, long term investments, and try to just use penny stocks as a means of turning a quick profit where possible.
Check The Volume On Your Stocks
A high value stock isn’t worth much if you can’t sell it, which is why it is important to keep track of the volume of your stocks. Before you buy any asset, check its daily average trading volume to find out how easy it will be to buy or sell.
The higher the value of the daily trading volume, the easier your stock will be to sell once it has appreciated in value.
For instance, if a stock has a volume of 500 that you will be able to sell roughly 500 shares every day. If you have 2000 shares in this stock, then it could take 4 days to sell all of them, which may not be fast enough to capitalize on a spike in value.
For this reason, it is better to stick with a low number of shares across several companies, rather than buying lots of shares in a single stock.
Do Your Research
If you couldn’t already tell, the most important thing to remember when buying or selling penny stocks is research. You should aim to know as much as you can about any company you want to invest in.
This will give you an idea about how well the company is likely to do, and what chance there is of your stocks gaining value. Good research will help massively with avoiding losses and maximizing your profits.
Best Brokerage Companies For Trading Penny Stocks
The first step we gave for investing in penny stocks was to make an account with a brokerage company. However, you want to find the right brokerage company that won’t charge hidden fees or surcharges when dealing with stocks under a set value.
In this section, we have included a few of the best brokerage companies for those interested in buying and selling penny stocks.
Merrill Edge
This company is owned by the Bank of America, which can make it very easy to transfer funds from your bank to your investment account. They don’t charge any fees for buying or selling penny stocks, so you can keep most of the profits you make for yourself.
Since it is connected to an official bank, the research and information that you get from this company is very accurate and up to date. You also don’t have to pay anything to make an account making this a great way for beginners to buy and sell their first stocks.
Pros:
No fees for creating an account or trading penny stocks.
Connected to a reputable bank.
Provides excellent research and information on the current state of the market.
Cons:
More advanced traders will struggle to find suitable securities.
Interactive Brokers
Interactive brokers offer a great selection of penny stocks for you to buy and short. Their Trader Workshop, a desktop platform, is more geared towards professionals than amateur investors. However, if you can wrap your head around the slightly confusing interface, this is a good company to begin your trading journey.
The best part about this brokerage firm is that they offer a large range of stocks, many of which are far more valuable than penny stocks. This can help with building a balanced portfolio that is capable of producing both long term and short term profits.
While the learning curve for this company is a little steeper than some, if you are serious about investing, they are a great place to start.
Pros:
Offers a wide variety of stocks.
No fees for making an account or trading low value stocks.
Offers fractional shares for first time investors.
Cons:
The desktop platform has an interface that may be confusing to beginners.
Fidelity
Fidelity is a well known brokerage company, especially when it comes to trading low value stocks. They don’t charge any fees for creating an account, or for trading penny stocks, which is great news for small-time investors.
You can also invest in fractional shares, which is when you buy a fraction of a complete share of a stock. This helps beginners to afford portions of larger stocks. So they can diversify their portfolio.
The dashboard on the app is very easy to understand and navigate with up-to-date information on all of the stocks that they deal with.
Pros:
No membership or trading fees.
The interface on the app is easy to understand.
Allows you to trade fractional shares.
Cons:
Mobile apps may not update regularly enough for very active traders.
Can I get Rich Trading Penny Stocks?
All investments come with risks, but penny stocks are certainly among the most risky assets you can buy and trade. They are highly volatile, and often their value can change dramatically overnight.
Penny stocks are also not traded across major stock exchanges, and it is very common to not be able to sell your stock back to the same brokerage you bought it from. As such, these stocks represent a bigger risk than most larger stocks, and the profits you can gain from them are never going to be groundbreaking.
However, penny stocks can be a good way to learn more about investing and trading stocks. They can give you a better idea of how markets work, and if you get lucky, they could even turn you a small profit.
However, if you are looking to get rich from your investing, your portfolio will likely need to contain more than just penny stocks.
Overview
Penny stocks are one of the least known stock options out there, and that is because they are very difficult to make money off. However, if you want to learn more about stock trading, without spending loads on more expensive shares, then penny stocks can make a great starting place.
Just remember that you need to do as much research as you can before buying cheap shares in any company. You should also never spend more than you can afford to lose on any kind of stock, whether it is a penny one, or a high value investment.