Essentially all investors would agree that their primary goal is to enjoy the largest return on the smallest investment. This is why penny stocks are extremely appealing to so many individuals. For example, there is no need for one to make a large investment on a per-share basis; however, if the stocks' value increases, a generous return is possible. Obviously, no type of investment is foolproof and no financial planner can boast a guaranteed return, but consumers who learn how to locate the appropriate penny stocks usually enjoy satisfactory results from their investment. Nevertheless, before a person can learn how to make money with penny stocks, he or she must have a basic foundation of knowledge about these types of stocks.
Definition of Penny Stocks
It is quite common for a consumer to hear the phrase "penny stock" and immediately assume that it refers to stocks that can be purchased for a few cents. However, the term actually refers to stocks that are available for less than ten dollars a share. Because of their low price, investors can purchase a high number of these stocks, as opposed to being shut out by expensive stocks that are financially out of reach.
Buying Penny Stocks
Penny stocks are based on calls that are speculative at best, but they can be a very profitable investment for savvy consumers who know how to develop a hunch for buying the best ones at the proper time. It is important, however, for investors to understand how penny stocks are traded and other essential information about this type of investment.
Similar to purchasing other stocks, an investor can buy shares of a penny stock through any stockbroker. Whether or not the stock is listed on a major exchange is irrelevant. Penny stocks are always traded through pink sheets, which is a phrase commonly used by laymen to describe an over-the-counter quote service, as opposed to a major stock exchange, such as NASDAQ.
Because of the trading method used for penny stocks, it is not necessary to file with the Securities and Exchange Commission, nor are stocks of this type subject to numerous disclosure regulations, as is the case with their more expensive counterparts. Experts in the field of investments state that this may or may not be an advantage to consumers.
Similar to any type of investment, there is a certain amount of risk associated with penny stocks, but high returns are possible for savvy consumers. To minimize risks, investors must choose stocks wisely and demonstrate exemplary timing when making their purchases. Financial planners often recommend buying stocks of this type from fledgling companies, as large price dips and surges can be expected. This trend works in the investor's favor in most cases.
Investors seeking ways to slash their risks should consider stocks offered by corporations that are somewhat recession proof, such as those offered by manufacturers of healthcare products, diet pills, or other goods and services that are continuously in high demand. Other tips on how to make money with penny stocks include the following:
It is important for investors to properly analyze the balance sheets and income statements for the penny stocks in which they invest. Reviewing revenue over the past three years for each stock is a good place to begin. Even though the debt may outweigh the revenue for individual stocks, a profitable trend should be evident overall or the investor should probably refrain from making additional purchases.
It is also essential to research the products, services, and marketing plans associated with each penny stock. For instance, specific low-priced stocks may advertise an innovative new product or service, but have a lackluster marketing plan that ultimately prohibits the future growth of the stock. Similarly, a penny stock company may have a marketing plan that was well designed, but simply not have goods or services that generate a significant amount of interest among consumers. Therefore, it is wise for investors to research the industry in which the company operates to determine if future growth is anticipated in that field or if interest will quickly wane among consumers.
It is also important to determine whether or not the company has any financial statements available. If there are published statements of this kind, investors should carefully analyze them to decide if the company's stocks appear to be a good risk.
Conducting Online Research
Fortunately, now that investors have access to the Internet they can reach other individuals from whom to obtain opinions. For example, prospective investors may find that visiting penny stock forums is a wise course of action, as they can note specific stocks that are not receiving positive reviews in the investment community. However, it is important to understand that forum members are usually not experts and for this reason, a person should never base his or her decisions solely on the opinions of forum members or other investors.
Seeking Advice from a Financial Planner
Those who are interested in making money with penny stocks may choose to seek the advice of a broker or financial planner. However, it is essential for consumers to realize that such services are not free, but rather are associated with specific fees. This should be taken into consideration before making a final decision on whether or not to retain the services of a broker, but in most cases, having a broker handle the purchase transaction is beneficial to the investor.
Finally, as with any financial investment, it is essential for consumers to conduct business only with reputable brokers or organizations that can be verified in an independent manner. Most investments are associated with specific risks, and purchasing stocks is always a speculative venture. Ultimately, however, investors who proceed with caution and make educated decisions with regard to buying penny stocks typically find that the latter are a great tool with which to begin an investment portfolio.