Penny stocks are small company’s stock trading at very low price per share. Such stocks are high risk and high volatile trades and are subject to manipulation by stock promoters and pump and dump schemes. These stocks present a high risk for investors, who are often lured by the hope of making large and quick profits.
Despite of high risk and other notable concerns, the penny stocks are always in limelight of investors who like to make huge profits. The business of these small, young and prosperous companies has a huge potential to grow their business and hence, the stock price tend to double of even increase to three times in short span of time. People looking for earning quick money mainly prefer penny stocks.
Taking an example, penny stock trading at $5 per share can get double to $10 per share or can increase to $15 or $20 per share, but it is very difficult for blue chip stock at $1000 pricing per share to achieve 2000 level.
Penny stock investments can be a boom for the investor, but on the other hand; it is coupled with huge risk for the investor and provide equal opportunity to lose the trading equity. So, these investments must be done with lot of cautious.
Here are some tips for investors to how to invest in these penny stocks and make huge profits:
- Trading volumes: Penny stocks are illiquid in nature. It is advisable to look for stock with consistent high trading volumes rather than average trading volumes. Analyzing average trading volumes can be misleading. For example, if stock ABC is traded with 1 million shares for 1st day and no share traded for rest of week, than its average daily volume will be 2 lac shares, which can be quite misleading for investors. In order to get in and out at an acceptable rate of return, consistent volume is must to be considered.
- Efficient management: While choosing the penny stock, investor needs to analyze the efficiently of management or promoters. Many startups incur loses initially, but have the need to analyze the reason for the same. The promoters must know how to make profits in business. Researching the right company for investing lower the risk of loss of capital and increases odds of much higher return.
- Plan Entry & Exit in stock: Penny stocks are very illiquid and that is the reason they can get highly volatile in their price movements. An investor must plan the entry and exit levels for the stock and must work accordingly as volatility make stock quickly move up and move down just as quickly.
- Authentic source of information: Penny stocks are manipulated by big investors and operators. Misleading positive information and statements are spread out through various means like fake press releases, SMS, emails, newsletters etc that persuade common investor to buy the stock and when price rises, and operator dump that stock, hence trapping the small investor. It is advisable that the source of information must be authentic because right source with good analysis makes perfect choice of stock and hence result in profit for investor.