There are many reasons why investing in penny stocks (also known as micro caps) makes sense. They are a great option for many people because they are inexpensive to purchase and can realize a high return on just a small move in the stock’s price. Although they are named penny stocks, this does not mean that they are only stocks that sell for under $1. In fact, penny stocks encompass all stocks that sell for less than $5.
With micro caps, a very small change in the stock’s price can result in a very large profit for the investor. As an example, you will double your money if you purchase a $2 stock and its value shoots up to $4. With more expensive stocks, an additional $2 increase in the stock’s value may not mean all that much. A $2 increase on a stock that was selling for $70 is a very small increase in value. You can clearly see that a small increase in a penny stock’s value can result in a dramatic profit. Price increases such as these are considered normal with penny stocks. Because of this, there are many investors who focus solely on this lucrative sector of the market. Penny stocks that make a simple, rolling pattern between two price points are frequently some of the best to focus on. These stocks are very predictable and easy to trade. Just wait for the stock to reach its historic top or bottom and then jump in on the trade. Such stocks are called “rolling stocks” and are very well suited for penny stock trading.
Why Are They Inexpensive?
Although penny stocks are very easy to trade and are usually very well suited for the stock trading beginner, there are some caveats you should consider before entering the micro cap market. One thing you definitely need to remember is that although penny stocks are inexpensive, they are inexpensive for a good reason. It could be that the company is still very new and they don’t have a well-established history. It could also be that the company was formally a much-higher valued company that has hit hard times. Definitely take the time to study a penny stock company before spending money to purchase their stock. Does the business they are in have long-term potential or are they in a fad market? Do they have a long history or are they a new start-up? What is their long-term viability look like? If things look questionable, don’t invest in that company.
Volume – It Matters
A penny stock’s trading volume is something else you should consider. In order to successfully buy and sell any stock, you will need sufficient volume to be able to quickly enter and exit a trade. If the penny stock company you are considering is a company that hardly anyone ever trades, it probably does not have sufficient volume to be worth your time. After all, if few people are buying and selling the stock and you need to quickly find a buyer for a trade position that’s going south, what do you do? You’re just stuck. That’s why it’s important to always consider trade volume before investing in any stock.
Watch Out For Scams
There is a popular scam that is perpetrated with penny stocks that you should be aware of as well. It’s called the pump and dump. In this scenario, a person will buy a tremendous amount of low-priced penny stocks and then post a lot of news articles about how great the stock is in an effort to quickly increase the stock’s value. This is called “talking up the stock” and it’s an illegal practice. All of the sudden good news about a particular stock causes people to take notice and they quickly jump in and start buying the stock, causing it to quickly increase in value. The person who is perpetrating the pump and dump will then quickly sell the stock after it increases in value for a quick profit. The large sell-off that follows can result in the stock’s price quickly plummeting. If you see a penny stock suddenly jump in value, you should be suspect of a pump and dump scam.
Penny stocks can be a great investment vehicle for both new and seasoned investors. Before you invest, take the time to learn all you can about this market and be on the lookout for pump and dump scammers.
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