As we mentioned, trading penny stocks is risky. Many of these companies are fly-by-night and highly volatile, which puts traders in a position to lose big. However, you can still make money trading penny stocks if you trade smart and know what to look for.
What makes a penny stock a potential money-making stock? There are a few characteristics to look for:
A company needs to make money. A company that loses money will always be a bad investment, no matter how low the share price is.
A company needs substantial assets or cash. Strong businesses shouldn’t need to liquidate future viability to appease creditors, because they have enough cash to account for contingencies.
A company must have a strategy in place. Penny stock companies don’t want to be Penny stock companies, so the successful ones have a strategy in place to grow the business and get listed (or re-listed) on a major exchange. These goals should include rebuilding a long-term business and paying back investors.
These three characteristics help you determine a great penny stock to invest in and how to minimize your risk.
1.) Pump and Dump Penny Stocks
The “Pump and Dump” strategy lives by the mantra “buy cheap, talk up, sell high.” Basically, a trader will try to find and buy a penny stock cheap, then convince other traders that it’s worth more than that price and sell it to them.
This is one of the most difficult penny stock trading strategies, besides being unethical and possibly illegal. This may sound familiar: You get an email promising the hottest penny stocks that are poised to skyrocket. Buy now and lock in the profits.
The problem here is that stock doesn’t increase or decrease without a cause. Maybe there was a merger, maybe the company secured an exclusive deal, or maybe there was a change in management.
Regardless, something spurred the change. Whatever it was, you should question why this person would want people to buy more of the stock, which makes the price go up, and also question how they know it will go up. In most cases, your email promoter bought shares of this stock and wants to sell it at an inflated price, so they’re trying to entice buyers by calling it the next hot penny stock.
The business fundamentals are the same, so there’s nothing indicating that the stock is worth anything more. This promoter just wants to unload the stocks and turn a quick buck.
Though hardly a strategy, the idea behind this is to buy cheap, wait for the luck to change and sell. Unfortunately, there’s no way to predict luck or which penny stock companies are going to have an unforeseen change in fortune.
A financially ruined company could go out of business and sell everything to creditors, leaving you with a fraction of what you paid. A struggling company can have an unexpected turnaround.
3.) Find the Hidden Penny Stocks Gem
The only sound way to make money trading penny stocks is by applying the same rules as normal trading. Do your research, buy a discounted stock on the upswing, and be patient. Some businesses just need time to get back on their feet.
Some businesses are bought out. Some businesses restructure and come back stronger. Some businesses are undervalued. In any case, these are the stocks that can make money.
Unfortunately, these 3 opportunities are rare and difficult to predict, but they do exist. Using value analysis and carefully determining the companies to buy will give you a chance to find the hidden gems.
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