How to Invest in Penny Stocks
Penny stocks are often some of the most exciting plays on the market due to their low cost of entry and their ability to yield massive gains in short amounts of time. Of course, they’re also known for extreme volatility that can both give rise to those big gains but also see some of those earnings evaporate in an instant. That’s why knowing how to invest in penny stocks is an acquired skill and is different in certain aspects than investing in more traditional companies. So let’s tackle what you need to know about investing in penny stocks 2017.
How Do Penny Stocks Work?
Penny stocks aren’t necessarily different than your average stocks, with the exception that, as the name implies, they are a good bit cheaper. A penny stock is usually deemed as a stock with a dollar value in the single digits or less that has the potential to breakout.
The reason for their popularity among a certain set of stock traders is that you can buy a lot of shares for a small investment with the hope that they can skyrocket in a short amount of time.
Take, for instance, Ethereum. While not a traditional penny stock—Ethereum is a cryptocurrency like Bitcoin—the principle for penny stocks is illustrated quite effectively by ETH’s rise.
You see, Ethereum was worth less than $10.00 a short year ago, but ended up peaking above $400.00 at one point. While, again, cryptocurrencies are an entirely different ballgame in certain respects, the main point here is that people who bought a hundred ETH coins for $1,000 in 2016 were able to generate massive returns in an absurdly small time frame.
It’s the prospect of these types of surges that often draws people into the penny stock market in the first place.
So what are the best strategies in terms of how to invest in the penny stock market?
The first one is to do your research.
While this is a hard and fast rule for nearly all investment types, this grows exponentially in importance when considering penny stocks. After all, there’s a reason these shares are valued so lowly. They have not yet proven themselves or their business concept, perhaps, are new companies, or have been hit by tough times recently. In any case, they often have baggage worth examining. Blind investing is always a dangerous game. That goes doubly for the penny stock market.
Another key to the how to invest in penny stocks strategy involves identifying industries where the best penny stocks will likely be found. For instance, in oil downturns, oil company penny stocks won’t be doing you much good.
Conversely, if you were following the news for marijuana stocks, then jumping in on a marijuana penny stock in the early stages would have yielded large returns, even if the company would eventually fall back to earth.
So it’s important to follow an industry as well in order to project growth for these penny stocks, since finding in-depth information about these lesser-valued companies can be difficult at times.
Another point of note is that penny stocks are traded on the open market but can also be bought over-the-counter through the OTC Bulletin Board (OTCBB) and/or through the use of pink sheets.
It’s important to remember that the manner of how to invest in penny stocks changes depending on the stock you’re picking. For instance, if you believe in a company and its product, then a buy-and-hold approach might be the best way forward. But seeing as how penny stocks are often subject to an increased frequency of day trading and shorting due to their volatility, the penny stock market can carry with it some added risk for more conservative investors.
As a final note on penny stocks, a few key industries are often better at developing these types of low-value winners versus others. For instance, tech-sector penny stocks are quite popular these days, for good reason.
Cryptocurrencies, for instance, have seen a number of entities that are valued at the penny stock level make large gains in a short amount of time.
The lithium penny stock industry is also one that is gaining in popularity and is believed to be on the cusp of some larger gains, as shown on the chart below.
Chart courtesy of StockCharts.com
Artificial intelligence and augmented reality are another two industries where the future seems bright and their time is nearing, meaning that penny stock investments in these industries could be a boon to investor portfolios.
In any case, how to invest in penny stocks is not impenetrable, but it does take work and some rethinking of your usual investment patterns. It’s a risk/reward market that favors foresight and bold moves, but also has the potential to backfire tremendously. But with the promise of massive gains for little initial investment, there’s a lot to like about penny stocks 2017.