Given that nearly half of the country owns no stocks at all, the ability to trade and flip stocks is for a more or less specialized market. However, since penny stocks offer such a low barrier to entry, you could be investing today if you have money in your portfolio. The only major factor is that you understand how and why you should even be looking at penny stocks.
Here’s what you need to know about penny stocks.
Understanding Penny Stocks
There’s no specific definition governing what makes a penny stock. These stocks can be worth as much as $5 to be considered a penny stock. While this is more of a working definition than a dictionary definition, it’s valuable to understand what is meant by the term.
Some go by market capitalization when trying to classify something like a penny stock. In these cases, anything with a market capitalization between $50 million and $300 million is classified as a penny stock. If a stock trades on small exchanges but not on the major ones, then you’re also talking about penny stock.
If it’s easy to buy up lots of the stock at an extremely low price, then you might consider what you’re trading as a penny stock.
Usually, this stock is created by a small company that might not have much liquidity to be trading around. Some great companies go public and have their stocks classified as penny stocks for a while at first.
If things seem very speculative and you don’t see a clear future in this stock’s ability to grow, then you can consider it a penny stock. Others might be speculative because it’s hard to get information about them. If disclosures are weak and spotty with bad communication from C-level executives, then you’re talking about this stock.
Some assets just haven’t been vetted enough to be more than a penny stock. Others haven’t fully complied with the law yet or have had their products tested and vetted by national agencies, so they’re living in penny stock territory for now.
Understanding the Pitfalls
When stocks hold some of these characteristics, they end up being at a market handicap. It’s hard for investors to make an evaluation of the quality of a company when there’s a lack of understanding of where the company could be heading.
Liquidity problems are a major reason why stocks suffer. When liquidity is an issue, then it’s hard to pay for transactions and people with ill intentions are more likely to try to manipulate prices on the assets. If there are no trade volumes available, investors won’t be able to exit a penny stock, which is how they actually become valuable.
When assets aren’t on these major markets or aren’t monitored as closely, they’re more likely to be subject to bad actors. People can defraud the public or even the company itself with a “pump and dump” scam where they inflate value and then get rid of the stock, sending it tumbling.
Penny stockbrokers will often try to offload these slow moving stocks to new investors by giving them free recommendations, cold calling, or marketing. There are even internet marketing and email campaigns that have been created that have the potential to manipulate stocks and their value.
What’s Great About Them
While penny stocks have their small pitfalls, they also give you the opportunity to make a lot of money. Some penny stocks are immensely valuable and offer serious growth potential. If you understand penny stock investments, you can earn substantial returns over time, as you would with any other type of investment.
Penny stocks have helped a lot of small enterprises get their start. If you’re running a small business and looking to spread your wings, offering a low-cost stock option gives you the chance to build value.
They also offer small-time investors the opportunity to get shares in a company before that company hits a high-water mark. Being able to get in on the ground floor can help investors to get value form the companies they care about by investing their money and their time.
As more people have gotten involved with penny stocks, companies and regulators have gotten better at weeding out scams. When authorities can catch scammers before they defraud anyone, they protect the value of assets and allow everyone to get what they’re looking for. A world where penny stocks aren’t dangerous or risky is a world that offers a lot of value for everyone to earn.
What Investors Should Do
If you’re interested in making money in penny stocks, you need to do your research by looking into the resources available online. Books and even regular newsletters offer you the chance to understand what’s possible for a portfolio with penny stocks.
Do your due diligence before you invest. Run some analysis based on what kind of growth and expansion matters to you as an investor.
Look for solid liquidity and companies that are confirmed to have an uptrend before you invest. Companies that already have cash flow are much more likely to turn a profit than those that struggle. If you were going to invest in something like UPS, see what kind of quote for UPS shipping you could get so that you know the kind of money they could be making.
Make sure the companies you invest in have solid risk management strategies and make sure that you have your own as well.
Learning to Flip Stocks Takes Time
If you want to ensure that you flip stocks in a way that’s sure to earn you a profit, you need to do your research. Research is the most important factor in determining whether or not you’ll make a profit.
If you’re looking at the ups and downs of a major stock like Alibaba, check out our guide for some tips.