Penny stocks are highly volatile investments typically priced at under $5 per share. They’re not on the national exchange; instead, they’re made up of common shares of small public companies that trade at low prices per share.
As a way to enter the stock market at an affordable level, beginning investors will purchase these stocks and hope they appreciate so as to boost the buyer’s fortunes. However, this isn’t a simple process.
Penny stocks are priced so low for a reason, and that’s typically because the company isn’t doing so well of late. However, given that the market is always fluctuating, a poor investment one day might mean substantial profits a little later.
When you’re learning the ins and outs of penny stocks, it’s smart to take the advice of the best. Timothy Sykes is a world-renowned penny stocks investor who took $12,000 of his bar mitzvah money and turned it into $70,000 by investing in these tricky little stocks. He has since converted that money into millions.
Now, he’s devoting some of his time to teaching beginners how to make the most of their penny-stock investments. As a part of his instruction venture, Sykes created a useful infographic that covers penny-stock investing on a beginner level. Here are some of his top points.
It’s Not without Risk
One of the first principles cited in the infographic is that penny stocks are “highly volatile and require meticulous strategy.” In other words, penny stocks are dicey, and without proper information, investors could find themselves down thousands of dollars.
One of the most frightening risks is the “pump and dump” scheme. This happens when investors artificially inflate the price of a stock they own through false statements and inside information via newsletters, websites, chat rooms, stock message boards, press releases, or email blasts.
They try to make the market look better than it is in order to boost their current stock prices just long enough for them to make a profit, but this approach often culminates in an unjustified plunge in prices. Such manipulators are the very reason penny stocks are so vulnerable. A savvy investor knows to look out for such scams.
Though the risks are great, there’s good news: The losses you may sustain from an investment in penny stocks are typically much less than those of a larger speculation. As long as you cut your losses quickly, you can walk away without losing too much and invest that money elsewhere.
How to Pick Hot Penny Stocks
As Sykes is very careful to point out, you can only win success with penny stocks when you follow a careful strategy. A major part of selecting penny stocks involves noting the intrinsic value; that is, “Invest in areas where you know the market and can spot a quality product or service,” he says.
This may occur when a company has a great product that’s undervalued or hasn’t been out long enough to grab the attention it deserves. It may also happen when major businesses work on repairing their problems and are on their way to being listed on the national exchange again.
Sykes offers three rules for choosing penny stocks. These consist of the following:
1. Get out of trades that don’t go your way. This can include trades that have gained you money. It’s better to accept a small profit than risk a big loss when the market starts to shift away from your goals.
2. Shorting inflated penny stocks is logical. “Nowhere else in the stock market can you make such a predictable 30-70 percent profits in a day,” Sykes says. When you learn how to short the right penny stocks, it can be the start of a career in investing. It’s not the only way to make money, but it can work.
3. Cut losses quickly. When the market is going south, it’s almost always better to pull out immediately than wait and see if it will turn around. It rarely does right away, and you’re better off losing less money and investing what you have left elsewhere than taking a huge hit. This entails cutting loose your ego as well.
When you understand the risks, opportunities, and benefits of trading penny stocks, it opens up endless investment possibilities. Just like Tim Sykes, you could build wealth by playing the market carefully and learning the secrets of the penny stocks trade.