Business

3 Ways to Trade Penny Stocks

Penny stocks are an alluring form of investment, where you can invest small amounts of money for potentially huge rewards. However, penny stocks aren’t for the beginning investor. If you don’t know what you’re doing, you stand to lose big. When you know what you’re doing, however, you can enjoy a fantastic return.

As an example given by MarketWatch, let’s say you buy 10,000 shares of a penny stock at $0.30 each for a total investment of $3,000. If you’ve timed it right, the stock could reach as high as $1 per share, which more than doubles your investment with a payout of $7,000. The best penny stock strategy is one that’s well-founded on knowledge and experience. To be a success story in penny stocks, you must be smart about how you trade. Here are three ways to get started.

Practice first

Some of the best advice you can take when starting out in penny stocks is to get a few practice rounds under your belt before trading for real. There are many strategies to practice, each with low risk.

Many people learn with a strategy called paper trading. In this risk-free method, no money is required. You simply use a piece of paper and a pen to keep track of imaginary trades using real stocks. During this endeavor, you’ll learn from mistakes without spending a dime. You’ll also learn the lingo of the penny stocks industry and identify ways to find winning penny stocks. And there are apps you can use to invest in the stock market without real money, like SigFig and Stock Market Simulator.

You could also practice by putting down a very small amount of money in certain penny stocks, like less than $100, for example. You must be selective about this investment style because some stocks require a much higher minimum, but it’s a great way to invest in a real-time setting without the risk of losing thousands.

Focus on penny stocks with high volume

It’s best to focus on stocks that have a high number of shares outstanding. As a general rule, try to stick with stocks that trade at least 100,000 shares each day. Stocks with a low volume make it difficult to pull out if you’re in a bad position.

It’s also important to look for stocks that are priced at over 50 cents per share. Otherwise, the stocks won’t be liquid enough to easily find a buyer for your shares. Finding buyers for your shares is absolutely paramount to your success, so don’t invest in low-volume shares outstanding unless you’re okay with losing some cash.

Sell quickly

People often invest in penny stocks because of the potential to make 25 percent in profits within just a few days. However, too many people reach the 20-30 percent threshold, and then try to wait it out rather than selling right away. The problem with penny stocks is that they can go up or down very quickly. By holding out, you might get a slightly higher return, but it’s more likely that the stock will take a downturn. Don’t be greedy and sell quickly to maximize your returns.

Penny stocks are part of a challenging market. Once you get the hang of it, however, you’re set up for incredible opportunities for growth and money maximization. Get started early and practice to get the best out of each investment.