Penny stocks are traded at a very low price per share on the stock exchange and are quite different from the big companies stock. Unlike blue-chip stocks; they have low market capitalization, prone to scams like pump and dump schemes, low traded volume, have high volatile price movement and is a risky trade for the investors. They have the tendency to move either direction irrespective of market conditions.
In spite of these shortcomings or challenges in penny stock trade, they always remain under the radar of investors and traders for both long and short-term investment. They have a potential to give huge returns to the investors in a very short period of time like double or triple the returns in just a matter of a couple of months.
It is also true that penny stocks have a very low success rate for investors. On average only one or two stocks out of 100 are able to give positive returns and rest end up into a loss-making decision for them. The decision to make the profitable penny stock trade must be wise and efficient. The nature of these penny stocks is different from other traded stocks, the investor needs to adopt different criteria in picking the best penny stock out of the lot.
Here are few tips that can be followed while choosing the best penny stocks for a profitable trade. These are as follows:
- Pay Attention to Trading Volumes: Most of the penny stocks trade at very low volumes compared to the small, midcap and blue-chip stocks. The reason for low volumes is that they don’t remain in news, not known by masses and most of them are not in big investor’s radar.
It is advisable for an investor to pay close attention to the trading volumes of the stock on daily basis rather average weekly or monthly basis.
The trading volumes of the stock must be consistent. For example: If marijuana stocks are traded with a low number of shares on the 1st day of the week and no share is traded in remaining days of that week. The average weekly volumes will say it is only 4 shares traded per day but whereas it lacks consistency. Most of the penny stocks lack consistency and it becomes difficult for them to sell their holding even.
- Extremely Careful regarding Pink Sheet Penny Stocks: Penny stocks can trade on any stock exchange. Some of the penny stocks are traded on major exchanges like NYSE, Dow Jones etc. These are the big exchanges which are tightly regulated by SEC. Due to these regulations, there are very fewer chances of scams and have healthy market capitalization and also good financials.
The majority of the penny stocks are listed out of these major exchanges and rather on Pink Sheets. These pink sheets are more prone to scandals and scams as the rules and regulations are practically non-existent. This result in pink sheet stocks to be more risky trade for investors and they are advised to stay away or trade with extremely cautious.
- Avoid free Penny Stock Newsletter: Free stock tips on newsletters are a major source of pump and dump schemes for operators and big brokerage firms. The fraudsters recommend the penny stocks on newsletters, creating the hype and hence sell their holding at an inflated price which is popularly known as Pump & Dump scheme.
These free newsletters intended for scams, post a fake winner to showcase their positive results, just to make a positive impact on the reader. The free stock advice can ruin the whole of the investment. It is advisable to authenticate the source of information and clearly analyze the company’s performance before investing.
- Get recommended from Premium Subscriber: It is strongly advised to stay away from the free stock newsletters. One can put his money on stock recommended by the premium paid subscribers. These premium stock advisers charge a nominal fee for their subscription but the returns can be really huge. The profit from one can make pay for a fee many times over.
It is not easy for the small investor, who lacks knowledge; to analyze the company’s business. It is advisable to get recommendations only from a paid premium subscriber who has a past history of producing winners. Free penny stocks are always risky and manipulative.
- Promoters Holding: An investor choosing the penny stock for investment must ensure that promoters have a fair percentage holding in that company. It is advisable to pick the stock with a high percentage of promoter holding as they are the real owners of the company.
Chances for any penny stock to be a real gem or blue chip of future depends upon its business growth achievement. High shareholding of owners/promoters will ensure their vested interest in the business of the company and hence, it gives the opportunity for higher business growth.