What Are The Risks Associated With Penny Stocks
Given the scale at which the companies offering such stocks operate, they are prone to huge risks. These stocks heavily rely on the market conditions for growth in their value.
Apart from the basic perils which come with any market-linked securities, there are other forms of risks associated with penny stocks. These are
- Limited information: Given the fact that companies issuing penny stocks are start-ups, there exists a dearth of information on their financial soundness, past performance, growth prospects, etc. Individuals might end up investing in them half-wittingly. Therefore, conduct thorough research into the list of penny stocks in India before investing.
- Scams: Penny stock scams are commonplace in international financial history. One such popular method is Pump and Dump. Companies and scammers purchase a considerable amount of penny stocks resulting in value inflation which attracts other investors to follow the hype.
However, once enough buyers have invested in such stocks, such companies and scammers dump their shares. This results in an immediate lowering of value followed by losses on the scrupulous investors end as they try to sell it.
When you are browsing through the list of penny stocks in India, ensure to conduct thorough research on the respective companies. Gather information on their financial soundness, stability, growth prospects and any track record on their operations.
Beware Penny Stock Scams
Penny stocks often reside in the backwater of the market, on the over-the-counter exchanges, not on major exchanges. Outside of the big exchanges, companies dont have stringent requirements for reporting their financials to investors and may not have to report them at all. Key information is often missing about the company, perhaps even what business its in.
Penny stock fraudsters engage in two typical scams. The first is called pump and dump. A company or an individual shareholder might hire a promoter to send out emails and newsletters hyping a stock, hoping to push the price higher. The newsletter might make all kinds of promises about the companys products or future to get investors excited.
When the stock moves up as a result of the new demand, the individual or company sells a lot of stock at a profit , ultimately causing the stock to fall, according to the SEC.
Then theres the reverse of that, the short and distort. Here, stock promoters short the stock essentially bet that the stock will fall in price and then try to push the stock lower by writing negative things about the company. This hype may allow short-sellers to make a profit on the declining stock.
» Learn more:What investors need to know about short selling
How Can You Buy Penny Stocks Online
Don’t Miss: Is It Worth It To Invest In Bitcoin
Tips For Investors Considering Buying Penny Stocks
If you think you can handle the risks of investing in penny stocks, here are some tips to help you get started:
Do your research
This is important for all investments, but particularly high-risk investments like penny stocks. Blue-chip stocks are a low-risk option, with a long history of strong financial performance.
Plan a strategy and stick to it
Before you start buying, decide how much youre willing to spend and choose the penny stocks you want to invest in. And if the stock falls, decide on a price youd sell.
Keep your portfolio balanced.
Penny stocks should occupy the high-risk portion of your total investment picture, and for most people, thats a small segment.
Dont let emotions guide your decisions
It can be easy to get emotionally attached to a penny stock, as theyre often the underdogs in your portfolio. But when the stock price continually falls, dont make excuses as to why you should keep it stick to your strategy and leave your emotions out of your decisions.
Dont get sucked in by the cheap prices
Penny stocks may appear to be cheap compared to others listed on major exchanges, but dont base your investment decision purely on price. Basic factors that influence a companys stock price is the demand for its shares and the number of shares it issues. The less demand from investors or the more shares issued, the lower the stock price. So consider why penny stocks are priced so low.
What Are Penny Stocks And Where Can You Trade Them
A penny stock is widely considered to be any small-cap or micro-cap stock. In addition, some people also feel that stocks are not penny stocks if they are trading on a major exchange. The definition of penny stocksare securities issued by companies that trade for less than $5.
Major exchanges include the NASDAQ or the NYSE. Typically, you will find the majority of penny stocks available on the Over the Counter market. When discussing exchanges, its important to understand that each of these exchanges has its own standards that companies must meet. The NYSE exchange requires companies to maintain a minimum market cap and share price. Furthermore, companies must provide up-to-date and accurate financial statements to the public.
In comparison, the OTC market only requires companies to meet the minimum financial statement requirements. OTC markets also have Pink Sheets. The companies listed on Pink Sheets do not have to disclose nearly as much as anything trading on the NYSE or NASDAQ. This makes them extremely risky for investors due to the lack of information available to make an informed decision to buy penny stocks like these.
Don’t Miss: How To Invest In Physical Gold And Silver
Professional Diversity Network Inc
Professional Diversity Network helps connect businesses with potential employees. Employers can post jobs on the site, and applicants can view whats available.
Professional Diversity Networks services are looking more and more relevant as the pandemic persists, which could allow it to grow quicker than expected.
The company reported that its market had expanded by three to five times since the pandemic began. Share prices are down currently, but financial numbers are all moving in the right direction.
Compared to the previous year, total consolidated revenues for the three months grew by almost $0.6 million or 38%. Revenues for the PDN Network segment climbed by around $0.2 million, or 13%, compared to revenues for the same time last year.
If the company can continue its momentum, its stock price could follow.
Narrowing Down Trading Candidates
Now that you understand where to trade penny stocks, the next step is to determine what stock to trade. One popular method is to use stock screening tools, such as the one found on the OTC Markets website or Finviz. Screening for stocks with a price under $1 is the easiest way to narrow down the trading universe. From here, you can filter the list down further depending on your strategy and risk tolerance. Maybe you are only interested in penny stocks that conduct business within the sector of drug manufacturing, for example. In this case, youd make the necessary adjustments and then run the filter.
Once you get the hang of using Finvizs stock screener, your list, based on the filter above, should look something like this:
Don’t Miss: How To Invest In Us Stocks From India
Critically Evaluate Your Source Of Info
The most credible information on a company will come from SEC filings or an analyst report published by a reputable brokerage, investment firm, or independent financial-research firm.
Be skeptical of any unsolicited contact, like cold emails or telemarketing calls. Similarly, don’t trust stock picks and recommendations from sponsored content you see published on the web. Selita notes that lots of sponsored content on a certain firm may indicate that insiders are planning on dumping the stock after its price rises.
If the promotional material says “pennies to dollars instantly!” that’s a red flag and you should stay away.
Characteristics Of Penny Stocks
The price of penny stock can be more volatile than other shares. There is no assurance that they will give good returns on investment. The value of penny stocks may go down without any warning. If you want to invest in penny stocks, then follow the rule of “Don’t put all eggs in one basket”.
Penny stocks are characterised by high volatility in prices and do not have any formal listing on the exchange. Penny stocks usually carry high risks when it comes to investment, especially when trading them online.
Penny stock trading is not for everyone. It is risky, so only invest what you can afford to lose. Even if your research indicates that a particular penny stock will rise in price, there’s no guarantee that it will.
Here are some characteristics of Penny Stocks:
1. Low trading volume
You May Like: How To Invest In The Stock Market Under 18
A List Of Penny Stocks
Take a look at our list of penny stocksboth gainers and losers. Both tables update continually, so you can stay up-to-date on the best penny stocks. On the one hand, you might uncover an OTC stock. However, you might find cheap stocks that sit on major indices. As a result, you must be aware of how close a stock is to begin delisted. You dont want to lose your investment because the stock fell off the index.
As you learn how to trade penny stocks, you must remain diligent. Never invest in something you dont understand, and never assume that penny stock trading will result in a profit. Some penny stocks rise to $100 per share, and others dont.
Plus, penny stock brokers are assuming that you know what you are looking at. A free penny stock trading app operates similarly to a major brokerage. So, searching how to buy penny stocks on Robinhood will return a process thats no different from a free app.
Understanding Penny Stocks In India
Penny stocks in India are the stocks that are traded at a low price and volume. The minimum price of penny stocks in India is Rs. 0.01. Penny stocks in India are traded on the NSE and the BSE.
Penny stocks, because of their low price, are used to get trading experience for new traders. These stocks are very low priced, and it is almost risk-free to try your luck with penny stock trading.
Penny stocks are quite popular with small investors because of their potential for huge gains. The gains may be in the range of 300% to 500% or even higher. Even if you have a small investment of Rs 100/-, you can still gain up to Rs 500/- profit.
In India, these can be defined as shares of companies whose market capitalisation value is less than Rs. 10 Crore. These stocks have a huge potential for investors if they have access to the correct information and support, but there are several risks involved.
Recommended Reading: Investment Company Of America Class A
How To Find The Best Penny Stocks To Buy
When it comes to finding the best penny stocks to buy, there are easier ways than just picking a random ticker trending on Twitter. First things first, the best refers to stocks that have the best opportunities to make a strong move.
Heres where a good penny stock screener will come into play. Youve got your pick. Some of the best penny stock brokers offer built-in screeners and options for you to design your own. Personally, I think TD Ameritrade has a few good options. You could also use things like Trade Ideas or FinViz to put a scan together to find stocks under $5 that meet certain criteria.
When Should Investors Invest In Penny Stocks
When you are well-informed and cognizant of its inherent dangers, if the risk does not deter you and you are interested in penny stocks, you will need the aid of a stockbroker to participate. In addition to commissions, stockbrokers often charge a flat fee for transactions, so include this in your calculations.
You May Like: Which Investment Company Has Lowest Fees
Unusual Volume In Penny Stocks
One of the first things youll want to identify is stocks with irregular or above-average volume. This method allows you to more or less follow the money because when theres unusual volume, theres typically an unusual event that could act as a catalyst. For instance, certain penny stocks may hit a scan for unusual volume even if the company itself doesnt have any news. This would pertain to something like industry-related news.
For instance, when cannabis was legalized in Canada, most of the marijuana penny stocks broke out big. Not many attested that to their own news but rather the sector move in response to the big industry news. Sometimes, unusual or high-volume penny stock screeners can pick up on the groundswell before the average Joe investor puts the puzzle pieces together.
Brokers’ Duties And Customer’s Rights And Remedies
If you are a victim of fraud, you may have rights and remedies under state and federal law. You can get the disciplinary history of a salesperson or firm from the NASD at 1-800-289-9999, and additional information from your state securities official, at the North American Securities Administrators Association’s central number: 737-0900. You also may contact the SEC with complaints at 272-7440.
Don’t Miss: How To Easily Invest In Stocks
Are Penny Stocks High Risk
This leads me to the next common question: Are Penny Stocks High Risk?
ANSWER: Penny stocks are very high risk.
However, its one of the few ways to actually make considerably higher amounts of money for lower sums of capital. Lets say youve got $100 in your account. But with a real strategy and a keen understanding of the basics, you can make money with penny stocks starting with smaller sums.
If you were to buy $100 worth of any of the penny stocks under 10 cents, for instance, your risk/reward is very high. In this example, lets say the stock is right at 10 cents. If that stock moves up by just 2 cents, youve just made a 20% return on your investment. That far outpaces the return that the market yields, per year, on average. If a stock like Apple were to move 2 cents, its unnoticeable to your bottom line. Now, the other side of this coin is if that 10 cent stock decreases by just 2 cents. Now youre looking at a loss of a whopping 20%. In the grand scheme of things, that 20% is equal to $20 which may not seem like a lot of money.
How To Select Multibagger Penny Stocks
Penny stocks are the investment world’s deadly double-edged swords.
While they present potentially the biggest upside potential of any group of stocks, they can also erode wealth faster than any other group.
You can start you’re search with Equitymaster’s stock screener to find the best multibagger penny stocks.
Specifically, look for these qualities…
- Strong balance sheet: Look for low debt, high cash balance, & a current ratio greater than 1 i.e. current assets greater than current liabilities. Equitymaster’s stock screener can help you find debt free companies.
- High promoter holding: The higher the better. It shows the promoter has skin in the game. Promoters buying shares from the market is a good sign. Use Equitymaster’s stock screener to find stocks where promoters are increasing stake.Avoid companies with promoter pledging. Equitymaster’s stock screener has you covered – Stocks with high promoter pledging.
- Quality of the business: Ask these questions. Is it a good business? Are the fundamentals strong? Will it be around after a few years? Is it making profits? Use Equitymaster’s stock screener to find profit making penny stocks.
- Cash flows: Does the business generate cash from its operations? If yes, then is it growing? How is the cash being used?
- Cheap valuations: It’s always a good idea to buy penny stocks when they are cheap. Check if the stock is trading below its book value. A margin of safety of at least 20% below book value is a good entry point.
Recommended Reading: I Want To Start Investing In Cryptocurrency
A Penny Stock Making New Highs Or Lows
When we talk about significant levels on a penny stock chart, the daily range should be considered. At daily highs, you might be able to identify new, bullish trade opportunities based on market momentum. Theres a reason stocks rise and if you see volume building in tandem, you can probably bet on a stock making another move. While this isnt foolproof, it is one way to identify potential penny stocks to buy. Some traders look for new daily highs and lows then mark it down as the pivot point to determine an entry level.
For instance, lets say a penny stock reaches its initial morning high. Some traders will sit back and wait for the pullback from those highs before buying penny stocks. Most of the time, this tactic proves correct. If the momentum is truly strong, penny stocks will rebound after pulling back.
In that case, just waiting a few moments can position you at a much better cost average compared to buying at the top. As far as new daily lows go, its a similar strategy except youre dealing with a downtrend. So youd want to wait for and see if larger buying volume comes in after a stock reaches a new low. Sometimes a bottom bounce can prove just as profitable as buying into a bull run.