The first thing you need to know about penny stocks is that they aren’t just stocks you can buy for a penny. Actually, penny stocks are usually anything between $5 and $10 a share, although the definition of what can really count as a “penny” stock will differ depending on who you ask. Perhaps the most important defining factor of a penny stock is the fact that it’s not listed on the major stock exchanges where you might do most of your day trading. This means that you can’t just buy a penny stock using the NASDAQ or something similar. Instead, penny stocks are available “Over the Counter” on a specific bulletin board, or on certain security exchanges. Here are 3 golden rules for penny stock trading.
Invest in Good Balance Sheets
A penny stock is generally an equity investment. This means that if you want to make the most possible money on the cash you spend, you need to check the financial strength of the company you’re getting involved with first. No matter what the price of the stock might be, start by looking at the balance sheets and search for companies that have a long-term debt that is no higher than 50% of the complete amount of shareholder equity that the business has. Additionally, it’s worth keeping the bets you make on penny stocks limited to companies whose long-term debt is less than the market cap that that business has.
Purchase Profitable Companies
Since you’re investing in equity, you really want to make sure that the investments you make are in profitable businesses. Investing in a publicly traded company – regardless of whether it’s a penny stock or not, will provide you with more liquidity to work with than you would have if you made a private investment. This means that you can exit the environment much faster if something goes wrong. However, it’s worth noting that private investments will have longer holding periods, so they won’t be as interested in profitability as they are in growth. Ultimately, the choice you make will depend on your ability to handle risks.
Know the Business
Finally, knowledge is power in any stock investment, whether you’re choosing penny stocks, or you’re trying to make money through day trading. The more you know about the stock that you invest in, the better off you’ll be in the long term. There’s a common saying in the investment market that if you can’t explain what the business does to someone else in a simple way then you probably shouldn’t invest in that company. Make sure that you can learn as much as possible about the company before you start pouring your cash into it. What’s more, it’s a good idea to start small with your investments, no matter how confident you feel about the business. Invest low and work your way up over time as you learn more about the market that you’re getting involved with. This will reduce your chance of a risky investment.