Buying Penny Stocks Right Now? Consider These Factors
Penny stocks are back in focus. With more volume than we’ve seen in the past few months occurring only recently, how can investors find the best penny stocks to buy? Well, this is a question with a lot of moving parts. It’s worth mentioning that we have a free e-book with over 60 pages, dedicated to this exact topic. But, if you’re in a hurry, this will help to get you on the right path.
Before we even put one foot in the door, let’s talk about what penny stocks are. The most simple definition is that penny stocks are any security trading under $5. It doesn’t matter what exchange or where you can buy it, if it’s under $5, it is a penny stock.
And while these cheap stocks have earned a bad reputation from the likes of Jordan Belfort and others, the reality is that the potential can be high if you know how to use it. And, there are plenty of different companies that offer either low risk or very high risk depending on your investing style.
Yes, most penny stocks are volatile. It’s not uncommon to see a double-digit percentage, spike, or drop in value in a given trading day. And while this may seem scary to some, this is also one of the main reasons that so many investors buy penny stocks. Now, there are two ways to go about it. On one hand, you can swing trade a penny stock. This means buying and selling and different price intervals in a short time frame. This is typically the most popular choice because, as stated earlier, penny stocks are very volatile.
On the other hand, investors can hold for the long term, hoping that a company has future potential. Both strategies can be profitable, but it truly comes down to what type of trader you are. Considering all of this, here are three things every prospective penny stock trader should know.
3 Steps for Penny Stock Traders to Consider
- Using Trends to Find Penny Stocks To Buy
- How to Use Volatility To Your Benefit
- How to Make Money With Penny Stocks
1. Using Trends to Find Penny Stocks to Buy
Using trends can be one of the best ways to find a penny stock to buy. Because of their speculative nature, short-term news events can have a very large effect on intraday price movements. Outside of industry-specific trends, investors should think about current macroeconomic aspects. The most obvious of these is Covid. Given that cases around the U.S. are hitting new lows, many investors are focused on what are known as reopening penny stocks.
These are companies that, as the name suggests, are benefiting from economic reopening. This could be anything from entertainment stocks to tech stocks and everything in between. With this category, it’s best to use your imagination to consider which industries may benefit from a drop in case numbers.
For example, a company like Cinedigm Corp. (NASDAQ: CIDM), operates in the entertainment sector. This company has seen a greatly increased demand for its online streaming services. This is given that more people are at home than ever before.
In addition, we have to consider the complete paradigm shift that the industry has gone through. While Covid may not be around forever, there will undoubtedly be some lasting effects from the coronavirus. This could be anything from increased work-from-home opportunities to a heightened reliance on food delivery companies and more. The next trend to consider is the entrance of blockchain and crypto penny stocks.
While cryptocurrency and blockchain, in particular, have been around for years, the recent trend of NFTs, has ushered in a new era for investors. Now, dozens of companies are working on utilizing this new technology to the best of their abilities. While some penny stocks have a larger role in crypto, others are taking a more backseat approach. For this reason, it’s best to fully understand the company before pressing send on an order.
2. How to Use Volatility to Your Benefit
As stated earlier, volatility is commonplace when it comes to investing in penny stocks. While this may seem scary at first, there are plenty of ways to use it to your benefit. The most common example is swing trading. Those who swing trade look for technical indicators and speculative events to turn a profit in the short term. For whatever reason, penny stocks tend to fluctuate greatly on a daily basis. This is most likely due to their low price and correspondingly high volume.
We do not often see price movements like this with blue chips, which gives penny stock traders a higher chance at seeing large profits (or losses). For example, often, we will see a $0.10 stock go to $0.20 in a day. However, it’s highly unlikely to see a $100 go to $200 in a day (unless it’s Gamestop Corp. (NYSE: GME)).
There are two things that go into making a price move. On one hand, we have the speculative factors. This could be a new product, a balance sheet, a press release, or anything similar. It could be a small event or a large announcement and anything in between.
On the other hand, we have the fundamentals. These are the numbers and financials that a company posts on its balance sheet. This can be a long-term factor to consider or something that could affect a stock in the short term. Using all of this information should help to give an investor a better idea when creating a list of penny stocks to buy.
3. How to Make Money With Penny Stocks
Making money with penny stocks can be easy if you have the right tools at your disposal. While getting a trading education will always be your best friend, there are a few know-hows that could help in the meantime.
The first is how to reduce the fear of missing out or FOMO. We all have that friend who won’t stop talking about how they could’ve made thousands if they had held or sold at a certain time. And while this is normal, it should be avoided to be the most consistent trader out there.
FOMO tends to occur when traders get lucky or end up buying or selling a security too early or too late. However, we can avoid this by knowing what to look for. First investors should make sure that a company has solid financials. This includes knowing its debt, EPS, profitability, and other contributing factors.
In addition, those who swing trade should have a thorough understanding of technical indicators such as chart patterns and intraday price movements. But, as stated before, getting a trading education is the best way to stay ahead of the game.
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Another tool used in making money with penny stocks is knowing how to take a profit. Most seasoned investors will tell you to first, set a price target. This should be a goal, but not one that is too lofty. Next, investors should take profit at several increments on the way to that goal.
For example; if a stock is at $10 and your price target is $15, you could sell 25% at $12, another 25% at $14, and the remaining 50% at 15. This way, investors can ensure that every trade could be a winner. With these steps in mind, making money with penny stocks can be easier than previously imagined.