Penny stocks are fantastic for many reasons. Most notably, you don’t need a huge bankroll to get started, and you can trade with confidence knowing that you don’t need to put as much money on the line compared with other account types to start trading. But penny stocks are a bit notorious for difficulty in terms of making a profit. Here are a few tips you can follow to ensure you’re trading penny stocks that will make some money.
Research
Want to know how to invest in penny stocks? Researching is a fundamental practice that should be a constant part of your investment strategy. Obviously, you’ll want to research the different stocks you can buy. More specifically, you’ll want to develop a set of criteria through which you vet stocks to determine whether they’re worth the risk of investing. You’ll fine-tune your criteria as you practice and gain experience as an investor.
Practice
Practice is also critical when it comes to picking winning penny stocks. For a total beginner, free tools that simulate trades using real-world data are a fantastic way to get started. You can also dive into online communities that have boot camps and resources to help you become a better trader.
Track Your Wins and Losses
A critical part of how you improve as an investor is tracking your wins and losses. Whichever broker you use should have tools that let you review a particular stock’s progress. Whether you lose money or make a profit on a trade, go back and try to understand what happened. This will help you gain an understanding of particular trading patterns so you can make better investments moving forward.
Understand Share Price and Valuation
It’s easy to think that penny stocks are more affordable than other types of investments and are thus a better way to make money. But this isn’t true — you have to think about the number of shares available, as well. For example, one company may have millions of shares available for a few cents each while another has a few thousands going for $100 each. The companies may even have an equal market cap.
In this case, you’ll be able to hold more shares from the first company compared with the second. But it may turn out that you could have made more by purchasing just a few shares from the second company. To avoid issues like these, you need to look at more than the share price when investing in penny stocks.
Mix Long- and Short-Term Trades
Making long- and short-term investments is a good way to maintain a profitable portfolio. Though you need to know when to cut your losses either way, it’s often a better strategy — i.e., a more reliable way to trade — to hold onto shares for years while they gain value.
These tips aren’t guaranteed to earn a profit, but they can greatly improve a trader’s chances of making money. The most important thing is to never stop learning and to continuously refine your criteria for selecting profitable penny stocks.
