Penny stocks are generally stocks that trade at a price of below five dollars though some purists insist that only stocks that trade at one dollar and less are genuine penny stocks. However, we should always keep in mind that penny stock trading is high-risk and it isn’t particularly easy to identify would prospectively profitable investments. Certainly you shouldn’t be trading penny stocks just because they look “cheap”. Among the hundreds of stocks that are available, only a handful will have the potential to return substantial profits on your investment but some of these stocks could potentially earn you thousands of dollars.
One benefit of trading penny stocks that people tend to overlook is that even a small upward movement in price could fetch you a substantial return on your investment in percentage terms because of the low price. The move from one dollar to $1.50 is a 50% return on your investment. Another benefit of trading penny stocks is that you have a limited downside because you are trading close to the rock bottom price. With a $500 stock, you could have a potential loss of $500 whereas with a one dollar stock, you cannot lose more than one dollar. Even a decline from one dollar per stock to $.50 per stock can only happen when there is considerable selling pressure on the stock.
Penny stocks are generally regarded as long-term investments so that you can maximize the return on your investment and it can often take months before a penny stock will move up in price. Even if we accept that because of the low price, your investment is small, it still makes sense to take your trading profit every time there is a reasonable price swing in your favor. In other words if you have bought stock at $2 and the price moves to $3, you should consider selling in the expectation that the price will go back to $2 and you can buy back into the stock if you like. If there is reasonable volatility in the stock, this would be a far better method of trading instead of buy and hold. If you can identify a stock that chart is identified as having a reliable trading range between resistance and support levels, you can make money whether the price is trending upwards or downwards
If you can identify the opportunity accurately, the most favorable circumstances in which to buy a penny stock is when the company is a potential target for acquisition by a much larger company. In an acquisition of this kind, the share prices of the smaller company tend to go through the roof. If you are exceptionally lucky or astute, and you identify a one dollar stock of a company that is then acquired by say Microsoft, you stand to make hundreds of thousands of dollars potentially. Another factor that can result in this kind of return is when a penny stock company owns assets that were previously thought to be worthless. For instance, the company may hold leases to prospect for crude oil and then makes a major oil find.