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[Warning Signs Of Penny Stocks Unsuitable For Trading]~[Warning Signs Of Unsuitable Small Cap Stocks For Trading]
Penny stocks can be volatile, so potential investors shouldn’t enter the market blindly.
There are some key basic points to consider and facts to know before you make the plunge. And there are certain stocks that you should definitely avoid getting involved with altogether. This article will detail the warning signs you should be aware of and which you should investigate before investing in a stock. Things to look out for include:
· Extremely low trading and dollar volume
· Large spread between the bid and ask prices
· Large and sporadic changes in price on low volume
· A stock with a long-term negative trend
· A broker restriction on buying or selling the stock
· A history of halted trading
· Long waits to get your orders filled
· Signs of fraud or dilution
Low Trading and Dollar Volume
If a stock sits dormant for long periods before being traded, there must be a reason for it. If you become involved with an illiquid penny stock like this, it may be difficult to sell. You should look at the average trading volume of a stock for a period of no less than 60 days. Shorter time frames can be affected by spikes on one or two days, which can skew the average number to a point where it may not be reliable.
You should also look at the dollar volume, or the total value of the shares traded in a transaction. This is especially true when dealing with stocks valued at less than a penny on Pink Sheets. If a single share is worth .001, even a trade of a million shares is only worth $1,000.
If trading and dollar volume are both low, it likely won’t be easy to get in and out of the stock at a price you like. If you try to sell a number that’s above the average amount of shares moved in a transaction, you’ll likely make the price of the stock go down. And even if you make a series of smaller sales over a slightly longer period, you’ll be hit with commission charges for each one.
Large Spread Between Bid and Ask Prices
A large spread usually indicates little investor interest in a stock. The problem is made even worse if there’s a low volume of movement. When there’s a large price difference between what buyers are willing to pay and what sellers are asking for, successful trades are hard to make and you’ll probably have difficulty moving the stock without accepting a lower bid price. And with a wide spread, illiquid stocks will often have a high price fluctuation either up or down on those occasions when they do trade. You don’t want to be caught holding a lot of shares if the price falls.
Large and Sporadic Changes in Price on Low Volume
Illiquid stocks can be vulnerable to surprise trades, where the price can drop suddenly if a shareholder elects to dump a large number of shares at once. Your best bet may be to hold these stocks for a longer period and hope that the price eventually goes back up.
Long-term Negative Trends
It’s difficult to predict when a stock will bottom out. So if you see a stock price has been trending negatively for a sustained period, it’s likely that it will keep on dropping and it’s probably best to avoid it altogether or cut your losses as soon as possible if you’ve already invested in the company.
These are some of the warning signs of penny stocks you should stay away, to get part 2 of this article please visit us at wallstreetreporter.net and sign up for our free penny stock & emerging market stocks newsletter.
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