Penny stocks are extremely volatile. For this reason they are high-risk, but they can also yield a high reward. The trick is in knowing where to invest and what to avoid. This is easier said than done, but there are some tips on this site available to make it easier in trading volatile penny stocks.
We’d all love to make some money out of trading good penny stocks. But it’s not as easy as you might think to find them – and if you aren’t careful you could get taken in by scammers. You need to find hot penny stocks on your own if you really want to find something worth investing in, but this is where lots of people go wrong.
- 1 What You Need To Know When Investing In Volatile Stocks
- 1.1 Why Investing In Penny Stocks Is So Popular?
- 1.2 What Is The Difference Between Volatile Stocks And Other Stocks
What You Need To Know When Investing In Volatile Stocks
Let’s take a closer look at this. If you have been looking into buying penny stocks or cheap stocks for some time you may have heard of the “Pump and dump” schemes by now. This refers to a scam which you should avoid at all costs.
Now there are several worthwhile sites out there which give good information and advice when it comes to penny stocks. But other sites are not so scrupulous. They will rave about a particular share in order to try and get lots of people to buy it. When that happens the price can go up – and that is when the person who recommended the stock in the first place will sell the stocks they had previously bought.
Needless to say they will make a profit. But you will end up with shares which are probably worth less than they were when you bought them. This is the downside of a penny stock. You need to ask yourself why such a stock is deemed to be hot in the first place. If it is only because someone says it is, and you cannot find any information to back that up, run in the opposite direction and stay well clear.
The types of cheap stocks to buy you want to go with are the ones where the company shows great promise for the future. You should never take the word of a single investor when it comes to investing your own money. Be prepared to do your own research in order to answer the question of whether you want to seize the penny stocks which appear to be hot.
Of course we’re not saying that you shouldn’t take anyone’s advice. What we are saying is that you should always consider the motives behind it. Watch from a distance and observe which people recommend which stocks – and then see what happens afterward. There are indeed pros and cons to going for hot penny stocks. You just need to sort the wheat from the chaff before you decide what to buy.
Why Investing In Penny Stocks Is So Popular?
First cheap stocks are easy to buy. Penny stocks are sold as common stock shares and are openly available to the public. Furthermore, cheap stocks are listed on every stock exchange for the financial gain of the general public as affordable investments.
Secondly, large ROI compared to stock price. The largest advantage of penny stocks is the potential for extremely high returns on the initial investment. It is common for some cheap stocks to double, triple or even exponentially increase in value within short periods of time. This is something that your average stocks have a tough time to attain.
The third and last reason it’s the low amounts of initial capital needed for penny stock investors to get started in penny stock trading. Most new investors do not have sufficient capital to invest in large amounts of regular stocks. Penny stocks can be enticing because of the opportunity to invest in large share amounts for very low initial capital. As your portfolio grows in value this will allow you to trade to even larger penny stock purchases in a much shorter amount of time.
What Is The Difference Between Volatile Stocks And Other Stocks
First the difference lies in the lack of public available information considering most volatile penny stocks. While larger companies need to regularly submit reports to the Securities and Exchange Commission, those listed in the OTC markets such as penny stocks do not. Therefore, information about these cheap stocks which analyst could use to project their future potential is difficult to obtain. Consequently, investors can be more vulnerable to fraud when investing in these types of stocks.
And second the major difference between the the two is the lack in minimum listing qualification needed for these volatile penny stocks to be listed. The firms trading through NASDAQ and other major exchanges have certain qualifications required before they are listed. Some of these qualifications include a minimum number of stockholders as well as a minimum amount for assets. This is in stark contrast for firms traded on the pink sheets and the over-the counter bulletin board that do not have to qualify with the set standards of major exchanges.
As you can see, cheap stocks have both benefits and risks. It is up to the investor to carefully weigh the facts and examine the risks involved in any penny stock investment strategy. With the right tools and time spent on research, a strong investment portfolio can be achieved.
OTCBB STOCK TRADING: Where The Most Volatile Penny Stocks Are Bought and Sold
Most volatile penny stocks are traded OTC(over-the-counter) and are thus quoted in over-the-counter systems (e.g. pink sheets and over-the-counter bulletin board). Over-The-Counter Bulletin Board (OTCBB): Real time quotes are displayed on this electronic medium. The previous sale prices as well as the trading volume of the stocks unlisted in the NSE and NASDAQ are also presented through the OTCBB.
A penny stock broker that subscribes to this electronic system can make use of the OTC Bulletin Board to monitor the pricing as well as to input quotes for the micro cap stocks. The OTC Bulletin Board is actually not part and parcel of NASDAQ. Investors should be wary of unscrupulous traders who claim and misrepresent certain micro stocks firms as part of the NASDAQ. Their statements may be there to mislead investors that a certain company is larger than it really is which is know as pump and dump schemes.
There is nothing more exciting than watching the value of your stock soar and trying to determine when to sell. It’s a rush that keeps a lot of people trading stocks. Well, that and the financial benefit from making a great profit.
4 Reasons Why Investing In Volatile Penny Stocks Is Risky
- Insufficient Information Given To The Public: One of the factor for success in investing is to be able to get sufficient information for better decision-making. However, information is not always available for penny stocks. This is because these companies are not compelled by the Securities & Exchange Commission to file information. Thus, penny stock companies are not subject to as much public scrutiny as blue chip stock companies.
- Exemption from Most Documentary Standards: Penny stock companies do not comply with all of the requirements of the major exchanges. This is the reason why they are traded through the pink sheets and OTCBB instead of the major exchanges. The pink sheets do not impose documentary requirements to penny stock companies. The OTCBB however, does require minimal filing of documents. The minimum standards include evidence of investor assets which could also serve as a benchmark in analyzing penny stock companies.
- Lack of Track Record: Penny stock companies include companies that are nearing bankruptcy or those that are just newly formed. Thus, these firms would be those that will have very little or even no track record to speak of. The lack of history makes forecasting potential gains difficult.
- Lack of Liquidity: If a stock is not liquid there are two concerns that investors would raise. The first concern is that they may not be able to sell a penny stock as fast as other more liquid investments. Investments that lack liquidity run the risk of further decreasing in value during a sale transaction. The second, a lack of liquidity opens it to the practice of price manipulation by some stock traders. For instance, traders may hike up the price by buying a large bulk of stock. They do this only to sell it all when the price reaches its peak. The end result is that the price suddenly plummets as they dump it in the market. This is one of the risks that investors take when investing in most volatile penny stocks.
The Technical and Fundamental Analysis of Stocks
Do you know what the difference is between the technical and fundamental analysis of stocks? You should do, because it could affect how you actually play the penny stock trading market.
Let’s make one thing clear before we go further. It doesn’t matter what type of stocks you are looking to invest in, or which ones are currently doing well or badly. What you are looking at here is what aspect of the available information you want to work with.
So what is technical analysis? This is a process of picking good stocks according to their performance. Chart patterns are used to see what each stock has been doing in the past, and this information is then used to try and predict where it could go in the future. This technical information is something you should become highly familiar with if at all possible. The more you learn about it and understand it, the more chance you have of buying and selling these volatile stocks at the right time.
In contrast, fundamental analysis looks into the penny stock companies which hold the stocks. The task here is to find out what you can about the company and make a decision about buying or selling their cheap stock by using that information. Needless to say this requires you to keep ahead of different companies and their financial information.
It is important to understand that no particular approach is right or wrong. In fact it could be said that a lot depends on the person using the approach. Learning about the technical and fundamental analysis of stocks is something that you need to do to figure out which one suits you best. Most people find that one or the other is the way to go for them, and it could depend on whether you are better off handling and understanding charts rather than raw information.
The point is that you can do well using either method, or you could do badly. Some reports have indicated that technical analysis has been proven to be successful, even though some technical analysts have had varied success over the years. A lot depends on the health of the stock market at any one time.
In the end, learning about the technical and fundamental analysis of penny stocks or volatile stocks means that you can decide which method is going to be the best one for you. There is no right or wrong answer.