Watch our video on penny stock research.
The penny stock sector is one that is highly popular among traders. Many times you'll hear crazy success stories. Don't fall for the hype. Instead learn to research penny stocks and make sure they're actually good buys.
“I made $20,000 trading penny stocks in one week."
As their name suggests, penny stocks are stocks of companies that trade with an extremely low share price. In many cases, it can be less than $1.
But a low share price comes with a different set of risks that are important to understand.
For those of you with small trading accounts, think less than $1,000, the lure of making a quick buck on a $0.10 scalp is understandable. I get it.
Not to be the bearer of bad news but if something sounds too good to be true, it probably is. Do I think you can make $20,000 in one day? Probably not.
But, do I think you can make a thousand in a day? Yes, I do. In fact, check out our live trading room to see penny stock trading in action.
So let’s review the penny stock research you need to do before you lay cash on the line. Read More
You need to look at the number of shares outstanding with penny stock research.
I might be going out on a limb here, but I think one of the fatal mistakes traders make is that they view penny stocks as affordable. They believe they are getting a bargain, being able to buy thousands of shares as opposed to being able to afford only ten of a higher priced company.
This makes sense at first glance. Think about it like this, if shares of Company A are trading at $0.10 and you have $1,000 to trade with, you can buy 10,000 shares.
Now compare this with Company B, which is trading at $100 a share. With $1,000 in your trading account, you can only buy 100 shares.
Who is in the better boat? The person with 10,000 shares or the person with 100 shares? For simplicity purposes, let’s go out on a limb and assume both companies have identical fundamentals but differ in the number of shares outstanding.
I'm going to let you in on a little secret: If you make the mistake of only looking at the share price, you might think the quality of the firm trading at $100 is higher than the one selling at $0.10.
As you can see in the example above, this might not always be true since they are identical. Moral of the story, consider the number of shares available for trading.
Dilution erodes the value of existing shares. Hence the need for penny stock research.
In the world of penny stocks, dilution is a dirty word. Dilution happens in a few different ways. Firstly, when a company decides to issue new stock to raise capital or undergo a stock split.
This ends up diluting an existing stockholder’s ownership percentage. Secondly, when holders of options decide to exercise their options, the number of shares outstanding increases.
Each stockholder ends up owning a smaller, or diluted percentage of the company with the spin off effect of making each share less valuable.
For example, Jerry’s Tire Wholesalers needs to raise money to expand their warehouse, so they issue an additional 110,000,000 shares. The share price then declines to $0.09 ($0.09 keeps the market cap steady at $100 million).
In this case, the underlying business, storing tires, hasn’t changed. But what has changed is the number of shares. More shares equal more availability, which causes the share price to drop.
Because of this, be extremely prudent when trading penny stocks to ensure the integrity of the companies share structure. If the penny stock has a history of dilution, it might be wise to steer clear.
Typically, most companies that trade with share prices less than a dollar have relatively small market capitalization's. That's why when it comes to investing, it's critical to understand the companies fundamentals.
How does the management team raise capital? Do they rely solely on issuing new shares? Is the company making money? Are they competitive in their sector?
Another key factor to keep in mind is that specific sectors commonly trade in penny stocks. Take the mining and metals sector, for example.
If you're willing to put in the time and do your homework, there are definitely gems that can be found. Penny stock research is incredibly important in this sector.
You don't want to get stuck with a pump and dump. Bag holding is never fun and now the way to grow your account.
Penny stock research should be based on verified data, especially from legitimate organizations. It will be very painful to work with misleading information and end up making losses.
When it is time to pay, you will have to dig deep into your pocket if you make the wrong move. You need thorough research on the market so that you can choose the best stocks.
Watch the markets and listen to underlying currents before making any move. Stocks may be overvalued or there might be a form of manipulation.
Media stories can also tell you something about a company and its stocks. The industry could have been hit by regulatory restrictions, leading to a reduction in earnings.
Watch the news trending or anticipate changes that should form a part of your plans. Failure to factor these changes will affect your earnings and the possibility of making profits.
Penny stock research might not seem necessary if you're getting the stocks from watch list. However, that depends on where it's coming from.
You want to make sure you're not getting it from somewhere that's all about manipulation and the pump and dump. Therefore, you need a penny stocks list you can trust.
What is the motive behind the list? Can they show you on a chart why you should or shouldn't buy. If they tell you charts don't matter, run!
You might see something we missed. We're not pumping our positions to you so that's something you don't have to worry about.
However, being able to do your own due diligence with penny stock research protects you. Check out our penny stocks course to learn how to safely and properly trade this sector.
Unfortunately, when most traders look at penny stocks, they often ignore the underlying fundamentals. In particular, the number of shares outstanding.
If you want to live to trade another day, it’s critical to examine how badly the shares are diluted through stock splits. What are the stock options in the company? How is the company raising capital?
Dilution hurts everyone, and sadly, it’s common with penny stocks. If you do your research and keep a close eye on the share structure, you're well on your way to finding winners.
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