If you’re looking to start investing in penny stocks there are a couple of things you should know…
But first, what is a penny stock?
The true definition of penny stocks varies depending on who you talk to. Personally, I class anything with a value of less than $5 a share a penny stock although I have friends who class anything valued at less than $1 a share a penny stock.
These shares are almost always avoided by mainstream brokers and investors as they represent a business which isn’t performing.
This lack of performance could be down to poor business decisions in the past, a lack of management and direction or even a business which has previously engaged in illegal or unethical practices.
However, this doesn’t always make investing in these companies a bad decision.
Some penny stock companies can turn themselves around with some investment, a change in management or a pivot in the business.
Figuring out which of these shares are most likely to achieve this is where making money from penny stocks comes in.
Don’t be fooled in believing that because penny shares are cheaper there are fewer risks involved.
There are actually more risks involved as these businesses are more likely to fail and therefore you’re more likely to lose all your money when compared to investing in traditional stocks which have shown continuous stable growth.
1. Ensure You’re In A Position To Invest
Before you start researching or purchasing penny stocks you need to ensure that you’re in a position to invest.
Investments in penny stocks are almost always long term (10+ years).
I wouldn’t recommend looking at any investments outside of retirement funds until you are completely debt-free including your house and have substantial savings.
The returns you make on penny stocks will almost always be less than the money you would save by paying down debt based on the amount of interest you’re paying.
2. Know The Risks
Penny stocks are riskier than traditional stocks, shares, bonds and index funds.
Be sure to speak to your financial advisor about your situation and discuss your options.
Although, based on my experience you’ll pretty much always find that financial advisors advise against penny stocks, because without a wealth of knowledge and experience they are pretty much always a bad investment.
I am not a financial advisor, this is simply my opinion about penny stocks. I can not be responsible for any advise followed in this article.
There are a number of other investments you can make with your money which do provide a relatively good (and much safer) return on investment. Be sure to compare these to penny stocks.
3. Do Your Research
Once you’re happy to proceed with your penny stock investment it’s time to do your research into potential companies.
Research into penny stocks can take anything from 1 week to 3 months to complete.
Researching each company is essential to ensuring your sucsess when investing in companies.
I suggest conducting your stock research over a multitude of different platforms including official company documents, forums, and independent research.
Avoid simply investing in a company because your friend or a family member has. This almost always leads to negative results, and a BIG argument.
Rather than pigeonholing yourself, look at between 3 – 10 different penny stock companies and whittle them down based on what you expect the future performance to be based on the research you’ve conducted.
4. Research Stock Brokers
Alongside your penny stock company research you should also research stockbrokers who trade penny stocks.
Different stockbrokers have different fee structures. Finding the right broker for you is likely to depend on the amount you plan to invest both upfront and moving forward (if you plan to purchase more penny stocks or traditional stocks/bonds moving forward)
Much like researching stock companies, it’s important to do your own independent research.
While I’d advise you to ask friends and family to share their experience with stockbrokers I’d encourage you to mix this with online research alongside the companies fee structure.
Ultimately, the perfect stockbroker for one person isn’t going to be perfect for another.
5. Purchase Your Penny Stocks
Once you’re happy with your penny stock company and your stockbroker it’s time to purchase your penny stocks online.
Start by signing up for an account with your chosen stock broker if you haven’t already.
Be prepared to provide your stockbroker with personal information and documents to verify in some cases.
Once confirmed login to the stockbroker and buy the stock.
The exact method of doing so will be slightly different depending on the stockbroker you choose however a good stockbroker should have a small guide (video or written) that explains how to purchase stocks and sell stocks using the platform.
Depending on the time of day you make the trade and the order the order may take a couple of days to be fully processed.
6. Track Your Stocks
You may be tempted at this point to monitor your stocks every move. However, I advise against this.
Instead, I recommend setting up some tracking software to monitor the trade.
You can even get some which alert you via email or text if your stock pushes a trigger. For example, send me an email if the stock price reaches $10.
Then simply move on.
The investment has been made, as I mentioned in the earlier sections of this article it’s a long term investment.
You’re likely to see upswings and downturns.
Hopefully, if your research has been successful over the longterm you’ll see more and larger upswings than downturns and be able to cash out for a profit.