You have probably seen ads all over the Internet, people claiming to show you How to Make Money with Penny Stocks. And while there are some that do make money with this method, unfortunately, you’re not likely to get rich if you buy penny stocks. Chances are you’ll lose money.
Penny stocks different from”normal stocks.” They are not listed on a major stock exchange which means that even if you have a good online broker, you may have to jump through hoops to buy them. Many new investors see stocks with super low prices and think they’ve either found a bargain or the next Netflix. After all, a stock that is trading at $1/share only has to rise to $1 to double your money, while a stock trading at $100/share has to gain $100 to double. Sound reasoning right? The math is true, but a bit misleading. The secret of making money with stocks is patience.
Check out these books as a reference:
Peter Lynch’s One Up on Wall Street or Vanguard Founder, John Bogle’s The Little Book of Common Sense Investing.
How Do I Know Which Penny Stocks are Good Buys?
While most people don’t make a killing trading penny stocks, there are opportunities out there. Finding a cheap stock to buy means looking for a bargain business that may have hit some kind of financial or business hiccup, but you think the business model, financials, management and product or service are sound and they can turn things around.
A good penny stock exhibits the following characteristics:
1. The company must actually make money.
2. The company needs solid assets or have the means to generate cash. If their creditors get impatient, a strong business won’t have to liquidate its assets and/or its future viability to satisfy their debts.
3. The company must have and execute a strategic plan, which should include growing a long-term business and being strong enough to get re-listed on a major exchange.
You really need all three factors reduce your risk of investing. Great penny stocks may exist, but the odds are against them and they can be difficult to find.
Steps for Finding Penny Stocks to Buy
One of the hardest parts about finding penny stocks is that obscurity works against you.
You’re looking for a stock that is undervalued. It must have a positive value, i.e. good financials and an solid long-term outlook. It also must be overlooked by professional investors and more importantly their algorithms, teams of Wharton MBA analysts and computer programs.
Now to buy a stock, there must be a seller willing to sell it to you at that bargain price. If your independent research shows that the company’s really going to turn around, why wouldn’t the seller just hold onto it and wait until it gets more attention? But hey, maybe you can luck out and find someone willing to sell you shares at a fire sale price. Now the other side of the penny.. stock, is the sell. Once you’ve found that rock bottom price and bought that great penny stock, you’re going to have to try to sell it to someone somehow. You may be able to hold onto it for a while, but it’s been flying under the radar right now for a reason. People either aren’t looking at it or don’t want to buy it. So with a non-liquid asset, how are you going to unload it? Your best shot is to hang on until the company has a complete turn around and gets back on a more regularly traded exchange. That can happen. If it does, you’ve made a small fortune, but the risks are high.
There are many people that make money with penny stocks for all the reasons I’ve listed. There is definitely money to be made, a lot of money. This is the draw to penny stocks, you can make a huge score with just a few bucks. For a novice it resembles a gambling mindset not an investment mindset. Do your homework when it comes to penny’s. Understand that they are not traded on a major exchange so they are not very liquid, meaning you may have to hold it longer than you like until you can find a buyer. Try trading penny stocks in a paper trading account before you start risking your own money. Please please be careful and cautious when venturing into penny stocks, I don’t want you to lose your kids college savings account on some tip from @stocksizdabomb on twitter.