The term penny stocks is used to define assets, trading for under a dollar per share. However, the classification can differ from country to country. As an example, in the USA the SEC changed the term to include all stocks trading for under 5$. Besides having a low price, those stocks are known as a risky, speculative type of investment. Penny stocks usually have a low market cap and are trading on smaller exchanges with a low liquidity. The volatility of those markets is usually pretty high, meaning some significant profit and loss potential. If you want to learn how to buy penny stocks as a beginner, take a look at the following tips.
Risk assessment
If you are looking to trade and invest in penny stocks, you should assess the risk you are taking. Those risky investments are not suitable for everyone. The potential for profit does not necessarily mean you have to accept the risk that comes with investing in a small cap stock. There is nothing wrong with walking away from such a market. To leave those markets would often be a good decision as most of penny stock investors do take some heavy losses. Luckily, the reason for the majority of losses mostly equates to bad decision-making that can be avoided. This column will point out some of those mistakes and give you some basic knowledge for investing in penny stocks and don’t get caught up in a scam.
Risk management and early guidance
When investing in anything, you should always only invest the money you are prepared to lose. The riskier the investment, the smaller portion of your portfolio should it represent. Furthermore, you should only start getting involved with penny stocks after you obtained some knowledge about markets and companies you are investing in. It is always a good idea to follow someone with a proven track record in the investment markets you are interested in. If you take notes from more experienced investors, you will be able to avoid some of the mistakes they made while getting a better insight into trading techniques and market movements. You should be careful though as there is a lot of people who will try to influence you by telling you about expensive cars and assets they earned. You should avoid getting advice from those type of people as it is mostly based on some future promise of getting rich. People usually want to become rich quickly and become less careful when somebody promises them hefty returns. You should always look for someone who is knowledgeable and can support his claims with facts. Your early investing results are often in line with a quality of your mentor, so choose him wisely. At this point, it is also important to point out, that you should not trust any of your sources completely. It is better to simply use their advice and then do your own research. For example, you can always find stocks by yourself using an online stock screener.
Paper trading
If you want to increase your trading knowledge without risk, you should try the »Paper Trading« method. This is a risk-free method where instead of trading real money, you are just writing down imaginary trades. In that way, you can learn from the mistakes you are making, without risking any of your real money. This will also get you familiar with all the penny stock expressions, all in all, making you prepared for some real buying and selling. You should also realize, that it may take months of paper trading before you are ready to start trading speculative shares.
Trading on unregulated markets
One of the more common mistakes investors can do is investing in penny stocks, that are trading on the Dark Markets. It is more advisable to invest in companies on better known, regulated exchanges as they have more credibility, meaning the risk of buying worthless or overvalued stocks is lowered considerably. This is especially important on markets, like the cryptocurrency market where things are still highly unregulated. So far, the only licensed firm in the cryptocurrency market is Regal RA DMCC.
Deciding which industry to invest in
Seeing the value of the most favorable penny stocks often drops notably when the trends change you should usually avoid getting yourself involved with the most popular types of stocks at the time. This happens, because by the time a type of stocks becomes popular, all of the hype and popularity is already included in its price. When people turn to the next big thing, the prices usually drop significantly. Following the latest trends can, therefore, be very costly. It is usually better to invest in companies and industries you are familiar with. If you are passionate about a particular activity or industry, you can always use your knowledge to your advantage. If you are not sure which industry you are familiar with, just check your email subscriptions, hobbies or professional expertise. You can also research the top picks at popular websites or youtube channels. We made a guide on the best cryptoucurrency to invest in along with price predictions. Most of the people don’t even realize the advantages they have when investing in their own industry or field of expertise.
Conclusion
You have to always bear in mind that this is a risky type of investment. The penny stock markets are very volatile and the dynamic price swings are not for the faint of heart. However, following these basic guidelines, you can make sure you lower your risks and engage the markets in a proper way.
