Investing in the stocks/equities market has always been one of the most popular areas for investors. Investors such as Warren Buffet have made their billions by buying huge stakes in companies and owning them for years. This has proven to be a prudent way of allocating capital. For instance, an investor who invested $10,000 in the 60s with Buffet, the money would now be close to millions. Warren applies value investing techniques to managing his portfolio. In this strategy, he advocates owning strong companies that have good products and those have a sound management in place. An example of such a company is Coca-Cola which will make money no matter how the economy performs. Warren invests in blue chips stocks. There are other investors who have perfected the art of investing in small listed companies. Penny stocks are so common especially to day traders because of the amount of money they can make with a small price movement. For instance, if you have $1000, you can buy 1000 shares in a small cap stock trading at $1. Therefore, if the price moves to $2, you will have doubled your money. With leverage, the gains will be much larger. As a day trader, it is possible to make a lot of money using penny stocks. In this article, I will explain a few ways to improve your income through penny stocks.
The first thing you need to know about penny stocks is on the risks involved. Most penny stocks are companies that are valued at even less than a million dollars. As such, some of these companies do not have the capital to do what blue chip companies do such as hiring the best Chief Financial Officers and good auditors. In addition, some of these companies usually have a lot of debt and legal issues. Their reporting standards is usually not similar to those of blue chips. For instance, since they are not followed by many investment banking analysts, investors are kept away from crucial information. This is the main reason why you will see the shares of the companies go up by at times more than 300%.
Not all penny stocks companies are bad. As a day trader, your role is to identify high quality companies that are probably undervalued and investing in them. In doing your research, you should first look at the company’s financial statements. This will importantly show you the amount of debt the company has compared to its equity. Then, you should look at the investors who have backed the company. Large investment companies such as TPG and Jana partners have invested a lot in small cap stocks. By looking at these investors, you will be at peace knowing that they have done their due diligence.
All this due diligence is particularly useful when you are planning to buy and hold the company. If on the other hand your strategy is to get in and get out on the same day, technical analysis can help you. By using technical analysis techniques, you will be at a good position to identify the trend, get in and get out when there is a reversal. For a day trader, it is also important to read a bit about the recent happenings in the company by reading the recent news.
A good example is that of a trader who placed a short position on a small cap company known as KolaBios. He entered his trade and went to a meeting, first without setting up the stop loss and take profit. After the meeting, he found out that there was some breaking news about the company. His trade was now in the negatives. As a trader, you should always avoid this especially when dealing with penny stocks.