People who are new to stock trade waters are often misled into believing that cheap stocks with their low price per share have the greatest potential to make money. This logic dictates that a small stock worth needs to gain small dollars to double your investment, which attracts people to penny stock trade. But things aren’t simple as that. Tackling penny stocks takes guts, nerves and a bit of gambler’s luck. Only the brave may reap the harvest of these cheap shares. Read on to discover how they work and you can you learn to return your investment.
Penny Stocks Explained
Penny stocks are equities which are sold for very low prices, less than $5 per share. Instead of NYSE and NASDAQ, they are primarily sold on over the counter exchange (OTC). Their lure comes from their low price. Investing $1000 can get you a lot of shares, which can potentially bring you a lot of money for a small price increase. And truth to be told, the Internet is full of penny stock ads, incredible stories of people making big money overnight. Those cases are mostly true, but few and far apart.
The risk involved in penny stock trade comes from their extreme volatility. Being the shares of small, unestablished companies, their value often fluctuates in an unpredictable manner. This is the reason why some online brokers even refuse to buy them for you. Still there are loopholes that let you trade them at your own risk.
How to Turn them into Profit?
There are two ways how to capitalize on these microcaps: pump and dump or find a turnaround company. These strategies aren’t easy. If you are looking for a less risky and easier way to invest for your retirement at a steady pace, you may as well look elsewhere. On the on the hand, if you can deal rationally deal with risk, read on.
Pump and dump scheme is probably the most popular way to make money with penny stocks. Basically it involves buying a cheap stock, persuading other people that it is are worth much more than you paid for it and then sell it at the pumped-up price. Still, this activity is unethical, and perhaps even illegal in your jurisdiction. To be honest, it’s not easy to make it work.
At one point you must have received a spam email yourself tipping off a great penny stock with estimates of the huge price increase. If the stock price in question is really about to increase, it will happen for several reasons, ranging from the improvement of the underlying business to the company being acquired. So why would your anonymous benefactors want to sell those shares now, driving the price up in the process, instead of buying more for themselves?
A more likely scenario is that your anonymous tipper bought shares at 15 cents and is keen to persuade a lot of people to buy shares at 40 cents, inflating the excitement for the stock in order to convince more buyers. The truth is that nothing in the underlying company has changed, the stock is still priced for $15 per share. You can learn a great deal about these risks from this infographic.
From time to time, businesses go through some hard times, facing total bankruptcy and end up restructuring at a great value. In some cases they have valuable assets like real estate, capital equipment or patents that are interesting for an acquirer. In some cases a company takes just some extra push to stand upright and get back into business. Unfortunately, these investment opportunities are very few and far apart. People who can predict when a shipping company will make a turnaround or a bauxite mine will double its production are rare. Yet, it happens. If you are patient and follow the analyses, you will be able to find companies that have the potential to turn around and return to top exchange listings.
Is this Penny Stock Worth Investing?
The stock price itself cannot tell you if it is a good investment. You need to find out about the company value. It’s simple, companies that make money are worthy, and those that don’t are not. In addition, you should take other variables into the equation, like if there are any valuable assets that the company owns. And on the other hand the bankrupt company assets of may be claimed by creditors. There are true, great penny stocks out there, but you need to smell them out.
Odds are against you getting crazy rich on penny stocks. Still, you can earn substantial by adhering to value investing in true microcaps with realistic prices, instead in those ridiculously cheap ones. Don’t fall for free email tips that spam your mailbox. Instead try doing some research and analysis yourself.