A Guide to Making Money Through Penny Stocks - Introduction
We have all read stories of successful penny stock traders. People who have amassed vast amounts of wealth buying and selling penny stocks. Recently, I read the story of a teenager who made more than $72 million buying and selling these stocks. In this article, I will explain the best ways to make money through penny stocks.
Penny stocks are shares of companies that trade for less than $5. Often, these companies have a market capitalization of less than $1 million. Some of these companies were once large corporations that lost their way. However, some are companies that were penny stocks from the start.
Most traders love penny stocks because of the price of their stocks. Since these companies trade at less than $5 per share, traders believe that they can make a fortune by spending at times less than $100. For example, assume that company A’s shares trade at $0.5. You have $100 and decide to invest in the company. You will have 50 shares. If the company’s stock price moves to $1, then you will have doubled your money. If you use leverage, the amount you make will be very high. On the other hand, if you have just $100, it is not possible to buy a single share of a company like Amazon which goes for close to $1000. This is the reason why penny stocks are very attractive among many traders.
As a trader, it is very important to know certain things about the market and how it works. The first thing you need to know is that many penny stocks are companies with a lot of problems. They have a lot of debt and in some cases, the companies sell nothing of value. A story is told of a penny stock company that had only one individual and no known office. The company sold nothing and its price only appreciated because a few insiders bought the company to push the price higher. As many investors bought into the dream, the insiders exited their stakes and the investors who bought had no one to sell to. The stock collapsed.
Therefore, if you are interested in penny stocks, your dream should not be to invest in the company. The dream should be to trade, where you enter and exit a trade after a short period of time. Investing in penny stocks, where you buy and hold the stock is often a bad idea. This is because the future of these companies is often bleak. For example, many investors buy small penny stocks of pharmaceutical companies which have a drug in the pipeline. They buy hoping the company’s drug will pass regulatory scrutiny and then become a money maker. Often, these companies fail because of the complexity of the drug creation process.
Another thing about penny stocks trading is that the traditional fundamental analysis does not work. Investors often spend a lot of time studying companies. They look at what the companies do and determine whether they are undervalued or not. In many cases, they buy undervalued companies hoping that their stock price will get to a higher value. For penny stock traders, this is not an appropriate thing because of the opaque nature of the penny stock companies. It is very difficult to research a company that does not make investor presentations and one that does not release its audited financials. Therefore, the best thing to do is to use technical analysis to find the best time to enter and exit a trade.
However, you need to know that not all companies trading at less than $5 are penny stocks. A company like SiriusXM trades at less than $5 yet it is a transparent multibillion dollar company. Therefore, if you do intensive research, you can easily find quality companies that trade at such prices.