Managing Risk And Leveraging Profits In Trading Penny Stocks
Penny stocks can be highly lucrative, yielding a very good return on investment but they also carry a lot of risk inherently – if the company fails, the investors lose all of their money. Managing risk, therefore, is the key to long term success in this niche. Contrary to the popular belief, penny stocks actually carry a higher risk than ordinary stocks. Penny stocks are those stocks that trade for very little, typically a few dollars at the maximum and the underlying company has a limited market cap. Since they sell for very little, they are well suited for all types of investors, from small to medium and ordinary households can simply take out a payday loan for trading in penny stocks.
There is no beating the mantra of higher returns at higher risk and penny stocks do not change this rule. The reason why certain stocks can trade for so little is because the market sees no potential of the future in these companies. Usually, these are either medium companies in the bankruptcy phase or startups that don’t have a proven potential. While investing in penny stocks, it is important to realise and manage risk. The higher return part of penny stock investing is easy to get – if the company can exit bankruptcy, its share value can increase several fold. For example, a stock trading for $0.5 can jump to $5 in a matter of days because the company was successfully able to turn around or a startup could convince a larger corporation of their idea. Such stories are not unheard of in the world of penny stock investing.
One of the problems with penny stocks is that there is a general lack of information available. This is bad for the investors because a lot of times investment decisions are made simply based on a rumour. This can lead to unnecessary losses for the investor. One always tends to hear about a friend or colleague who got rich overnight when the penny stock prices increased say 20 times from a few cents to a few dollars. These stories are inspiring but one should never forget the risk behind this investment as well – lots of people lose money in this market. Like with any other trading, knowledge is power and one should try to get a lot of legitimate information about the company that one wants to trade. One can go through financial newspapers that can be subscribed for a few dollars every month by taking small payday loans. Also, as beginners, it is strongly advised to invest in only type of stock, which reduces risk and gives the investor an opportunity to understand the nuances of this market for the future investments. In addition, they can concentrate on their resources for better returns.