Starter Guide: 7 Practical Tips on How to Buy Penny Stocks

Investing in penny stocks is among the fastest ways to earn money nowadays. Reason being, it offers affordable shares compared to other businesses. Sadly, it is also one of the companies that are flooded with scammers that will do anything to take your money.

If you want to benefit from penny stocks, it is vital that you understand the steps you are supposed to follow to ensure that you are making the right decisions.

This post will give you some few tips on how to use penny stocks to earn big money with limited risks. But before that, let us understand how it works.

How penny stocks work

According to Security and Exchange Commission, a penny stock is a security priced below $5, and that is issued by a small company. These are companies that are still trying to find their position on the market, and that is why this investment is considered a risk.

Penny stocks are usually unpredictable. They can reduce by 50 percent or increase by 150% overnight. Point being, Penny stocks can offer you more or take much from you depending on your timing. And that is why those who have tried will continuously advise you to keep watch and have a strategy that will help you sell your shares much faster.

If you want to maximize the benefits of investing in penny stocks while at the same time limiting the risks involved, here are some great tips.

#1 Watch out for risk factors

If you want to succeed with penny stocks, you must understand that there are many risk factors involved. One of them is that they are not as transparent as other stocks. Due to this, it is hard to know how they are going to perform. Most often, you will buy more shares and fail to find a buyer when you need to.

#2 Figure out a strategy

Without a plan, you will have a hard time benefiting from any stocks and penny stocks are not exempted. Before you buy any share, create a plan of how you will buy and sell them successfully. Many other stocks will require you to wait and sell when the shares have achieved their highest prices.

With penny stocks, you will have to sell it immediately; you see the price go up. Don’t wait for a stock to increase by a larger percentage. 30 percent is just enough. If you want to wait for the price to go higher, you can invest in cheap shares, hold them until they realize a major increase in price.

#3 Have a brokerage account

You won’t be able to make transactions easily and safely without a brokerage account. This account makes it easy for you to access stocks whose commissions and annual fees are low. When choosing your brokerage account, ensure it features charts and many other features that will guide you to make the right decisions.

#4 Choose high-volume stocks

The safest way to invest in penny stocks is to look for stocks that trade more shares daily. With low-volume stocks, you may have a hard time selling when the prices go up even with a small percentage. Also, ensure that your stocks are priced above 50 cents. Reason being, it is hard to convince a buyer with low-volume stocks purchased at lower prices.

#5 Use limit orders

Whether buying or selling your shares, use limit orders instead of penny stocks. Reason being, if you decide to use a market order, there are high chances you will be required to pay more than expected. To maximize your profits, use a market order. Doing this might save you a lot of trouble when buying a lot of shares.

One fact is, market orders will only work during regular hours. On the other hand, using limit orders will enable you to set a maximum or minimum price for your buy or sell orders. Due to this, your order won’t be executed if your price is above the market price.

#6 Don’t be misguided by promotions

Most often, over the counter penny stocks get promoted. For example, you can come across messages saying that the stock will be the next big thing. You might end up buying the shares with hopes that it will be the next big company. The truth is, these messages are always exaggerated and can misguide you in one way or another. And that is the last thing you need when you have big money to invest. To avoid this, do a lot of research before you make any steps.

#7 Be quick to sell

The riskiest part of investing in penny stocks is that you won’t know when the prices will go down or up. As mentioned earlier, it can reduce by 50% or increase by 150 percent overnight. It is always advisable that you sell your shares immediately the price increases by a significant percentage.

Reason being, penny stocks prices are never unpredictable. If you wait too long hoping that it will reach 300%, there are high chances you will be disappointed. Besides, you will only know how the company performs while you are inside.

Additional tips

  • Don’t buy stocks after the release of newsletter – One mistake many investors make is, waiting for the penny stock companies to release their news before they make the step. The fact is, you can never rely on the information you find on the internet.
  • Do your research – Before you invest in penny stocks, you must always keep in mind that not all companies are good. So, do a lot of research to limit the risks. First of all, don’t believe every word you hear from the company’s agents. Do your research, by searching for online reviews or inquiring from those who have invested in the company.
  • Always follow what is happening in the media – Media unlike websites are so transparent and will show you how the company is performing. However, it is important that you balance the time you spend on media and your computer.
  • Don’t hold to unfruitful investments – As mentioned earlier, when dealing with penny stocks, you must always be prepared for anything. Most probably, your investment won’t go well, but that doesn’t eliminate better options. If you want to benefit from penny stock, don’t hold on to an investment that is dragging you behind. Sell it when you get an opportunity to do so.
  • Buy cheap shares and sell them for high prices – The secret behind penny stocks is buying cheap shares and convincing your buyers that it is worth more. While this sounds illegal, it is one of the easiest ways to succeed as a penny stock investor.
  • Don’t rely on one stock – One unfortunate fact with penny stocks is that you won’t know when you are making a mistake. Reason being, not all penny stocks will reach your expectations. The only way to stay safe is to invest in different stocks.

The final takeaways

If you want the easiest way to enter the stock market, then penny stock is your answer. But just like any other investment, investing in penny stock is a risk. You will always come across scams or misleading advertisements. If you are not too cautious when making steps, there are high chances you won’t realize your dream. So, ensure that you’ve conducted a thorough research and most importantly, use the tips above.