Penny stocks, priced under $5 per share, offer high return potential but carry substantial risk. To profit from them, research thoroughly, beware of scams, diversify your portfolio, set realistic expectations, use limit orders, and have clear entry and exit strategies. Avoid chasing hype and consult a financial advisor.
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“Any tips for penny stocks?”
(Original question on Reddit)
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A penny stock is a low-priced stock from a small company. These stocks are called “penny stocks” because they often cost less than $5 per share. They are riskier to invest in because they can have big price swings. Investors are attracted to penny stocks by the possibility of high returns, but they come with a higher level of risk and are often associated with speculative trading. However, with careful strategy and consideration, it can be possible to profit from these investments. Here are some tips:
Do Thorough Research
Before investing in any penny stock, research the company thoroughly. Look into its financials, management team, business model, and industry. Be skeptical of companies with little or no public information available.
Beware of Scams
The penny stock market is known for its susceptibility to scams and pump-and-dump schemes. Avoid unsolicited emails, social media promotions, or “hot stock tips.”
Diversify Your Portfolio
Diversifying your investment portfolio is one of the best ways to hedge against potential risk, especially when dabbling in penny stocks. Some professionals recommend that you devote no more than 10% of your individual stock holdings to penny stocks. This way, if it does end up being a scam, you won’t lose your entire investment portfolio’s value.
Set Realistic Expectations
Penny stocks can be highly volatile, and their low price per share can make them attractive to some investors. However, it’s important to set realistic expectations about potential returns and be prepared for the possibility of losing your entire investment. So only invest how much you can afford to lose.
Use Limit Orders
When buying or selling penny stocks, use limit orders rather than market orders. This allows you to specify the price you are willing to buy or sell, reducing the risk of getting unfavourable prices. So, on the exchange you are using, make sure to use stop-loss orders to limit your losses by automatically selling the stock if it falls below a certain price.
Have an Entry and Exit Strategy
When dealing with risky investments like penny stocks, it’s important to know when you will sell your shares should they move lower, limiting your loss, and when you will sell higher and take a profit. It’s often not worth holding on to these stocks for too long due to their unpredictability and high volatility, so make sure to take profits when possible.
Avoid Chasing Hype
Don’t invest in a penny stock just because it’s getting a lot of attention or is experiencing a short-term price spike. Often, by the time you hear about it, the best opportunities have already passed. Avoid FOMO and refrain from investing in hyped penny stocks with the hope of achieving life-changing gains from a single trade.
When considering investing in penny stocks, it’s important to keep in mind that they come with inherent risks. These risks arise from high volatility and susceptibility to manipulation, often driven by low trading volumes.
Therefore, penny stock investing is not suitable for everyone and should only be a small part of a well-diversified investment portfolio. It’s essential to approach penny stocks with caution and conduct thorough due diligence before investing any money. It’s always a good idea to consult with a financial advisor as they can provide valuable guidance based on your financial goals and risk tolerance.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The information in this post is only general in nature and is not personalised financial advice. Please contact us if you want financial advice.
