How to Buy a Penny Stock
A penny stock is usually traded at very low prices. Investors with high-risk tolerance like to turn to penny stocks. Extremely low prices allow them to get in a company’s stock with thousands of shares but with a small amount of capital. Some penny stocks are traded on regular exchanges such as Nasdaq, but generally, penny stocks are mostly traded on over-the-counter markets (OTCs).
OTCs are less formal and less regulated off-exchange markets where investors can find less well-known and potentially lucrative securities that may be unavailable on major exchanges. However, if you choose the right stocks with an upside growth ability and know how to lower your risk, it could raise the possibility of winning in this potential gamble. Here are some pointer for you to know if you were to buy a penny stock:
• Limit and diversify your holding: Cap your losses by limiting your holdings in the stock to no more than 1% or 2% of your overall portfolio. It also makes sense to diversify your penny stock portfolio, which shouldn’t exceed 5% to 10% of your overall portfolio, depending on your risk appetite.
• Check liquidity and trading volumes: Even if you’ve made a successful investment in a penny stock, you’re going to need to be able to sell your shares. You should have adequate liquidity and trading volumes in the stock so that you can trade it efficiently. Otherwise, you may wind up in a situation where there are few buyers and wide bid-ask spreads, making it nearly impossible to convert your paper profit into an actual one.
• Know when to sell: Penny stock is usually built for short-term trading, so it’s important to know when to sell. If you notch sizeable gains over a short period in a penny stock, consider selling them now rather than waiting for bigger profits that may not happen.
• Search for high-quality stocks: Basically, some penny stock companies are worth more than others. It is always good to invest what you know and do some substantial research before investing. Good prospects include ventures that are set up by experienced managers who have successfully exited a previous company; stocks that in the leading-development industries such tech and new energy.
Investing in penny stocks can be precarious, and is not for everyone. Even with all the risks and drawbacks involved in penny stocks, there are still investors who believe that the potential windfalls are well worth it.