How to Invest in Penny Stocks or Nano-Stocks

Penny stocks are a type of stock that can be very dangerous if you don’t know what you’re doing. They can be a great way to add some money to your portfolio, but if you are not careful they can tank your entire financial future.

This guide will teach you about penny stocks and how to invest in them safely. However, penny stocks should never comprise a significant portion of your portfolio. Many successful investors build their wealth without any penny stocks at all. If you are interested in this type of investment, be sure to do your research first.

What Are Penny Stocks?

Penny stocks are cheap shares of small companies that usually trade below a dollar or less per share. They are often called micro-cap stocks, nanocap stocks, or small-caps. The SEC recently changed the official definition of penny stocks to anything trading below five dollars, but most penny stocks trade much lower than that.

How to Invest in Penny Stocks

The Pros and Cons of Penny Stocks

Penny stocks are shares of small- or medium-sized companies. These companies (with small market capitalization) tend to be traded less often than larger companies. Their prices move more quickly than those of large companies. Penny stocks are hard to predict because they behave so differently from other stocks.

Penny Stocks Pros:

  1. High Potential

Penny stocks often fluctuate by a few pennies each day. A 5 cent increase might not seem like a lot, but if the original price was also 5 cents then that’s a 200% increase in one day. Investors who can afford to take bigger risks may want to consider investing in penny stocks.

Penny stocks are usually low-priced companies that may offer high returns. However, these stocks often trade at very low prices, making them more volatile than other stocks. A penny stock can go up quickly, but it can also fall rapidly. This makes it difficult to predict whether a penny stock will continue to rise or decline.

Penny stocks are a dream come true for investors who want to make quick money. However, they are also a nightmare for those who buy them.

How to Invest in Penny Stocks

Penny Stocks Con:

  1. High Risk

Penny stocks can be volatile investments. Investors should avoid them because they can go up or down by a few pennies per share. An investor who puts a large amount into a company with a low price could lose everything if the stock goes down.

Penny stocks are risky investments. Small cap companies are more likely to go bankrupt than large ones. You should avoid them. Buy-and-hold is not a great investment strategy when dealing with penny stocks.

 

How to Invest in Penny Stocks

How to Pick Penny Stocks The Right Away

Penny stock trading is an easy way to invest in unusual companies. You should put some safeguards in place before you start trading penny stocks.

A Good Stock Screener Is A Must Have

You should use a stock screener to screen your stocks before investing. A stock screener sorts stocks based on certain criteria. For example, you could filter out stocks below $10 or above $100.

Some Free Stock Screening Tools and Software

TradingView, Yahoo Finance, and Google Finance all offer really good stock screening tools for free of charge. However, should you require something more powerful, check out Trade Ideas.

How To Screen for Penny Stock Unique Characteristics

Penny stocks are shares of companies whose prices are low and whose market caps are smaller than 300 million dollars.

The price-to-earnings ratio is another tool that can be used to find penny stocks with high potential. A P/E ratio of less than 1 means that the company’s earnings per share are greater than the cost per share, which indicates that the company is profitable.

Do Your Research (DYR)

When you have a list of penny stocks you’re thinking about buying, do some research on the companies behind them. Are they profitable now or projected to become profitable soon? Is there room for growth in their industry?
It is also important to find out if the company has any plans to reduce the value of shares through stock splits or new share issuances. The more shares that are issued, the less each individual share is worth.

Time To Make Your Penny Stock Picks

When you feel confident that you have done your research and found a good stock, it is time to place your order. Be careful though – some brokerage platforms charge high fees for penny stock transactions, which can add up quickly.
When trading penny stocks, it is also wise to utilize stop limits and activation prices. This is because prices can change rapidly. Stop limits guarantee that your order will not go through if the stock price has increased past a certain point. Activation prices let you pinpoint a price point at which you would like to sell.

Our Final Thoughts

Penny stocks are more like lottery tickets than traditional investments. Though you can do research when buying them, much of a penny stock’s success is ultimately determined by chance.
If you’re thinking about investing in penny stocks, it’s important to set some parameters in advance. Determine how much you’re willing to invest, and how many penny stocks you’re comfortable buying. Keep in mind that you don’t want to invest so much that it skews your portfolio.
The most important thing is to never make a split-second investment decision. Just because you see a stock you considered buying skyrocket after you passed on it, don’t let that be the reason you take an unnecessary risk on the next nano-stock you see. With penny stocks, patience is key.