If you truly want to get your stock investor friends talking and excited, possibly in a bad way, raise the topic of penny stock investing. At the very least, your conversation won’t be dull. Don’t be surprised if a few disagreements or debates break out. This should not be surprised. After all, penny stock investing is one of the least understood forms of investing in the market. Too many people equate it with shady companies, dead companies, or ‘forgotten’ companies. To many investors, the term ‘penny’ in penny stocks make them think that this particular equities market is not worth their time and bother. Well, that’s their loss… and more potential profit for you and others who bother to understand what penny stock investing is all about and how to make money from it.
Let’s get one thing out of the way-penny stock investing is still stock investing. The only difference is the level of regulation, the size of the market, and the prices of the stock involved. Still, regardless of how you look at it and what point of view you have, penny stock investing is still stock investing. Keep that in mind. The same general principles of equity investment still apply. Those principles never go away even though penny stocks often involve less volumes, lower prices, and very little analyst attention. With that out of the way, another key point also needs to be made: you can make great money through penny stock investing. You just need to know what you’re doing. Keep the following tips in mind so you can get a better idea about penny stock investing.
Getting away from the shadow of pump and dump scams
The main reason many seasoned investors are scared or skeptical about penny stock investing is the threat of ‘pump and dump’ scams. These scams involve speculators scooping up a huge block of a cheap penny stock. The scammers then issue press releases or get involved in all sorts of awareness raising schemes that bring more investor attention to the stock. In extreme (and illegal cases), they make all sorts of false or misleading claims regarding the company behind the stock. Due to the fact that the stock is lightly traded, any upward movement in its price makes for eye-popping appreciations. This creates a snowball effect as the speculators publicize the handsome increases in the stock’s price and more investors get in on the action. As a result, the stock’s price continues to spike up. In fact, in many classic pump and dump situations, the short-term gains are nothing short of amazing. Well, this party has an unhappy ending when the stock’s price bursts and crashes down when the speculators dump their holdings. Just like with any stock, when other investors see the downward trend, they unload and this pushes the price even lower. At the end of the process, the speculators make off like bandits and legitimate investors walk away with a loss or hang on to nearly worthless stock. Situations like these make many investors wary of penny stock investing. Thankfully, pump and dump schemes are exceptions and not the rule in penny stock investing. The good news is that you don’t have to automatically suspect pump and dump schemes when considering penny stock investing. Are they a threat? Sure, but with the right training, you can spot them a mile away and avoid them. Instead, you can focus on genuine penny stock opportunities.
It’s all about finding hidden penny stock gems
In many ways, penny stock investing is not much different from trading in regular stocks. It is all about finding hidden gems. You need to find stocks that have a decent enough upside value that you can trade them over the medium to long-term. The first step in finding hidden gems in penny stock markets is to realize that not all penny stock companies are ‘loser’ companies or worthless companies. There are many reasons why companies trade on the pink sheets or bulletin boards. Each company has its own particular reason. You need to examine these companies on a purely individual basis. Only when you do so, can you realize the fundamental and real value each company brings to the table-if any. You still have to look at financial statements. You still have to look at market positioning. You still have to look at the fundamentals to tell which are diamonds and which are chunks of coal. The good news is that once you identify companies worth investing in, you can easily take a position since the company’s stock price is so low.
Momentum plays in under appreciated markets – time to invest
Believe it or not, there are momentum plays available even in penny stock investing. That’s right-you can make money in high volume, volatile stocks by playing momentum. While many investors think that momentum trading happens only with regular stocks, they are truly leaving money on the table when they overlook penny stocks. The great thing about momentum penny stock investing is that you can buy in cheaply and make money on volume. Of course, you need to buy stocks that have the right level of volatility and trading volume.
Getting in on the next big thing can reduce fear
Another key factor you need to appreciate when considering penny stock investing is that there are genuine stock trends in penny stocks. These are real companies that were down on their luck for a long time and finally are managing to get their corporate acts together. These are more common than you think-and they make for great stock buying opportunities. You literally get to ride a company’s rise to recovery. Once the company full recovers, it might get acquired and your holdings might explode in value.
Make no mistake about it, penny stock investing is not for the faint-heated due to all the negative buzz about there regarding this type of stock investing. Still, from a purely fundamental perspective, there is very little separating penny stock investing from regular stock investing. You need to do your research. You need to spot pump and dump scams from genuine opportunities. And you need to know when to get in when a penny stock is poised for some quick and dramatic upward movement.