The best penny stocks to buy - How to find them?

The best penny stocks to buy - How to find them?

Are you one of those individuals who want to earn rapid money in the market but have trouble deciding which stocks to trade? Then we have some exciting news to share with you!

Penny stocks might be just what you're searching for. But what exactly are penny stocks, and how do they work? Let's find out more about it and many other things down below.

Investors with high-risk tolerances often gravitate to penny stocks, which are defined as firms with a share price of less than $5. As the name implies, these stocks may trade for less than a dollar, enabling investors to own thousands of shares for very tiny sums of cash. If the price manages to increase significantly, investors stand to profit handsomely.

However, such stocks might just as quickly sink to zero. Because of their enormous bid-ask gaps, tiny market capitalization, and lack of liquidity, penny stocks are often regarded as extremely speculative, which is something that investors should keep in mind before making any decisions.

So, without further ado, let's get right into it and see how valuable penny stocks can be for your trading portfolio and how you can utilize them to obtain the greatest results.

4 Things to Know About Penny Stocks

  • For a stock to be classified as a penny stock, it should be less than $5 a share
  • Penny stocks are usually favored by traders who are just getting started in the market
  • The general idea behind investing in penny stocks is that you believe the price will either double or even triple in future
  • Penny stocks might not be a good choice for everyone, as it is associated with some risks

What Are Penny Stocks - Explained in Simple Terms

Trading penny stocks is a frequent approach for many new investors. Penny stocks, as the name implies, are shares with a low stock price, always less than $5 and often less than $1 per share. Another way by which these stocks are defined is by their market cap, with these companies often having a total market capitalization of less than $1 billion.

It's easy to understand why traders are enticed by the promise of investing a few cents in a company and then selling for a higher profit when its value skyrockets. A trader may acquire hundreds or tens of thousands of shares for a very little quantity of money.

Despite the fact that penny stocks and inexpensive stocks have certain benefits, they are not suitable for every investor. If a company's shares are valued at less than $5, and it has been in operation for a long time, it typically indicates that it is not doing too well. 

Penny stocks are frequently used by beginner traders, but it would be incorrect to say that it is not a good choice for experienced ones. If you are an investor who likes speculative markets, penny stocks can be a great choice for you.

How Does Penny Stock Trading Work?

Trading penny stocks isn't very complicated or technical. They're exactly like regular stocks, except they're significantly cheaper. In reality, trading them is similar to trading any other stock. However, there might be a few extra things that traders should know in order to make good profits.

Let's go through the measures you will need to follow to effectively trade penny stocks.

Selecting a broker

Whatever you do, the success of your penny stock trading strategy is heavily dependent on the broker you use. One of the main things to keep in mind is that not every broker offers traders access to penny stocks. Ensure that you check the available assets on the broker's website before opening an account. 

The firm should also be heavily regulated and licensed so you can rest assured that everything is above board. The license protects both you and your finances from any negligence. Trading with a regulated brokerage is always a safe and secure thing to do. However, you also need to ensure that the broker is regulated by a reputable regulatory body.

Think about your budget

After you've decided on a broker, you'll need to create a budget. The main reason behind this is the fact that penny stock investing is associated with numerous risks. You should always only trade with money that will not impact your livelihood. The thing about penny stocks especially is that there are many opportunities to make huge profits from them, but there's also a higher chance of losing all you've invested capital.

So making sure that you have a realistic idea of how much money you are willing to lose is critical if you want to maintain your financial stability.

Always hope for the best, prepare for the worst, and make sure that you won't end up living under a box if your investments go bust.

Diversification is essential

When purchasing penny stocks, think about how many firms you want to invest in. If you put all of your money into one company's stock and for some reason, they close down, you will end up losing all of your investment capital. Diversifying your wealth across numerous organizations protects you.

Finally, stop-loss orders are a very useful tool to assist you in dealing with the unavoidable ups and downs of the stock market. If the price of your assets falls too much, these orders will automatically liquidate them. This prevents you from going to bed with $1000 and waking up with only $20.

Choosing the Most Profitable Penny Stocks

While there are almost no differences between the way one would trade penny stocks as opposed to regular stocks, there are some things to remember when trading them. So, let’s see how you can trade penny stocks for the best possible outcome.

One of the most significant factors to consider when selecting penny stocks to invest in is fundamental research, trading history, and ensuring that you understand details about the funding of the company. We'll go through those factors one by one below.

The significance of history

Not every penny stock on the market today can be looked at the same as a year or two ago. Many stocks may have dropped owing to factors beyond the company's control (e.g. the pandemic). So, if the reason for their price drop is something temporary, so it may be a good idea to invest in this penny stock. Perhaps the company pumped all its earnings into R&D, making for a lower price at present, but setting it up for potential returns down the line. 

So you may be able to anticipate how much a given stock will cost in the future by researching the stock's history. 

To better analyze the historical price movements of the stock, individuals can perform technical analyses of the market. Technical analysis is very useful and helpful for traders as it provides them with detailed information about short-term price movements and possible patterns in how that particular stock price moves.

Understanding fundamental factors

Before investing in a company, traders should employ fundamental stock market research to assess its underlying worth.

Thanks to detailed fundamental market analysis, one can forecast potential market actions. This usually includes looking at news and chart-related data about the company, giving you an idea of what they are up to.

Without adequate market analysis, it is almost impossible to make profits in the market.

The company's accomplishments

Another essential consideration when investing in penny stocks is that many of these ‘cheap’ companies may be startups that went public too quickly, resulting in a low valuation.

In fact, some of them might be in need of capital to get going and reach their full potential. Check to see whether they're having any luck with this. If so, the stock is expected to rise and then stabilize if the cash is invested wisely.

With all this in mind, it is obvious why the most important aspect of investing in penny stocks is research. It is very important for investors to take their time and follow each of these steps very carefully. Even if you do all this properly, there is always a possibility that the company could fall on hard times and will lose a significant amount of money, also causing you to lose your cash.

Penny Stock Trading - Is It Safe?

Maybe. According to those that trade penny stocks, it's perfectly secure and might result in some substantial profits. Meanwhile, those who are just observing from the sidelines claim that it is the worst kind of investment option out there. Both arguments have merit.

There are certain reasons why a stock trades for less than $5 per share. 

Let's say it is just an overall crappy company. In this case, if the firm is doing badly, there is no need to invest in them. Isn't the whole point of investing to make more money? So, if a firm has been doing badly for a while, why would you want to risk investing in its stock? So the first danger is that it might just be a bad company.

The second possibility is that it is a completely new business. In that case, things can only go one of three directions. 

It either sticks around for a bit, then eventually vanishes because it was not worth a dime and you lose your money.

Maybe it is worth something and starts doing well. What usually takes place next is something called a buyout. This means that a bigger firm will see the value and gobble it up. If that happens you made a good bet and might see some returns as your stock will either be paid out or you will be given shares in the company doing the buyout.

The third option is the one you should be hoping for. This is that the firm does well, grows over time, and a few years down the line you sell your shares at a profit.

Trading penny stocks is by no means risk-free. Actually, there's another reason it's so dangerous, namely pumps and dumps. A pump and dump occur when a firm registers its stock for an extremely low price, maybe as low as 10 cents per share. 

People rush to it, spending tens of thousands of dollars to acquire as much stock as they can in the hope that the price would rise. Once it reaches a certain size, the largest shareholders (usually the corporation itself) just sells all of its stocks, pocketing the proceeds and completely ruining the price for the investors.

This commonly occurs when a firm lies about how much money it produced, artificially inflating the stock price, and then sells the majority of its shares off when others start jumping on the bandwagon. If this happens you can either expect the price to entirely plummet and many investors will be left with shares that are worthless and unsellable. 

The Best Penny Stocks for Investors

There is no single "best penny stock". As the market continues to evolve, any firm we suggest today may lose its standing within a week or two. However, there are techniques for recognizing an excellent penny stock at any time, so let us explain. We've narrowed it down to three important signs.

They are as follows:

  • The government has hired the firm
  • Within a year, there was already significant growth
  • The history of current management looks good

If the firm gets a government contract, you can be certain that it will have a steady and stable income stream. This is especially true if they are hired by a government with more left-wing-leaning ideas. Left-wing governments tend to be more interested in government expenditure, therefore this company's income is not only assured but could be fairly substantial. Furthermore, governments like to set up long-term contracts that continue for many years, ensuring that the company will have an income for the foreseeable.

When trading penny stocks, or pretty much any other stock, it's critical to look at prior performance. If the firm has had significant growth in the past and a continuation of that growth is still visible, it may be the go-to stock. For example, if the price increases from $1 per share to $3 per share over 2 years, it is a hint that the price might continue to go up.

The management team's history is equally important. If there are any bad members on the team, you can expect that something will go wrong sooner or later. As the saying goes, one bad apple can spoil the barrel.

What We Learned From This Penny Stocks Guide

  • Penny stocks are shares that cost from a few pennies to $5
  • Penny stocks are very popular in the market, especially among beginner traders
  • These stocks are mostly used by those who want to make long-term gains rather than a quick buck
  • While they can make you some profits, penny stocks can also be very risky

FAQs on Penny Stocks Trading

Is it profitable to buy penny stocks?

Maybe. Penny stocks can be very profitable as they cost just a few dollars to invest in but have the potential for huge gains. Usually, penny stocks are used by beginner traders, but there are many experienced investors who buy penny stocks as well. 

Why are penny stocks a bad idea?

Well, they are not a bad idea. While very popular, there are some people who believe that penny stocks are not a great investment. The main reason behind this is that penny stocks are associated with high volatility, which while creating numerous trading opportunities, also increases the risks. Penny stocks are also known for very low liquidity and lack of history and information, which can make it harder for investors to analyze their price performance properly.

How much should I invest in penny stocks?

Some experts suggest that you limit your exposure to penny stocks to no more than 10% of your whole stock portfolio. It's also critical to know your risk tolerance. In general, the greater your risk tolerance, the more prepared you are to take on the risk that comes with investing in penny stocks.