How to make profits from Penny Stocks?
Penny Stocks are those stocks that trade for very small share price and the companies not very well known.
Penny stocks are usually (but not necessarily) trade for low valuations (P/E) and have great volatility and carry more risk.
Having said this, Penny stocks can also have the potential to give exceptional returns in a very short time for those daring, high-risk taking, knowledgeable and well-informed traders.
Penny stocks are low priced usually for some reason such as the companies are looking for raising capital and have not enough capital in hand to record robust growth.
These penny stock companies may have been operating in sectors that have good prospects and run by good management and may have just insufficient funds due to which their share is low-priced.
If you can identify such hidden gems (penny stocks) then you can profit from them in a big way then things turn favourable with these companies.
It is a well-known fact that small companies tend to record higher growth rates than established companies and so can give a higher rate of returns.
So before underestimating penny stocks, it is worthwhile to look at them as what they are worth and their potential to turn your small capital into a big amount.
Risks of Investing in Penny Stocks
(i) You need to very cautious and careful with penny stocks.
Penny stocks usually carry high risk due to their greater volatility.
(ii) These are generally traded in bigger lots such as in 1000s.
So you may not be able to sell them as and when you want as there may not buyers always.
Penny stocks might not be so frequently traded on stock exchanges.
Opportunity:
Keeping aside all these factors, a well-planned strategy might take you to hidden gems.
But before you really enter into this arena ask yourself a few questions:
Why you are buying a specific Penny Stock? What are its growth prospects?
What is the exit price for the stock?
Before you make your self sold to the idea of buying the penny stock, consider the following factors and make sure the parameters are good enough to your satisfaction.
Company Fundamentals:
Make sure that the penny stock company has enough cash-flow and enough capital to hang on in the business. Check the balance sheet, cash-flow statement, profit-loss statement etc. to get an idea of the companies fundamentals. Don’t touch the company if it has significant problems in these areas.
Understand the Sector:
Research the business of the company and see if the sector in which operates has good growth potential and this particular company has enough prospect to cash in on that growth.
Valuations (PE and PEG ratios):
Compare P/E ratio of the stock with its comparable peers and also have an idea on the future growth estimates of the company. Only buy the stock with reasonable P/E and high enough P/E/G
Trading Volume:
Only buy stocks with high liquidity.
That way, you will be able to sell the stocks when you want to.
However, the best strategy in case of buying penny stocks is to minimize the risk is to plan your exit having decided your expected profits.
Do not just pump and dump the stock for reason that it costs you less than other stocks and will reach very high levels one day.
If you carefully follow these cautions and identify some stocks that have all these parameters then probably you can make a very good amount to return from these penny stocks.
Good luck and remember, only invest a small portion of your total portfolio in penny stocks and don’t be too greedy.
After all, these are high risk, high return investments.
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