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How to Pick Winning Penny Stocks

23 December 2021

Penny stocks are the type of stocks that get sold at very low prices. These stocks sell below Rs. 10 per share and belong to companies that have extremely low capitalization in the market. The stocks’ low price always attracts investors, but it is essential to understand that these stocks have a high risk that leads to huge premiums for market makers.

How to Pick Penny Stocks?

Here is a simple guide to picking the right penny stock:

  • Check if the Penny Stock is Right For You

There are penny stocks sold at low prices, but they can bounce back and increase in the future. Hence, you must place your money into penny stocks with those funds that you can afford to risk losing.

  • Understand the Conditions of the Market

Since the prices of penny stocks are unstable, you need to follow some financial specialists or stock advisors as they understand the business very well. With their guidance, you can avoid stumbles and get noteworthy returns.

  • Research the Company

There can be various misleading advertisements by way of bogus and deluding data done by people who buy huge amounts of stocks. Hence, you should always research the company through financial specialists.

  • Understand the Valuation and Price of Shares

The price of the stock will tell you about the company’s current value in the market. Before investing in penny stocks, you can investigate the company’s financial statements and then determine its value.

  • Practice Day Trading with Paper Trading

Before moving to penny stocks, get some actual practice to know more about the trading practices. Paper trading is typically a way to understand the trading strategies and check whether it would be paid off or not in reality. You can do this using demo accounts. 

  • Don’t Fall into the Trap of Constant Dilution

Whenever a company issues some additional stock, it reduces the value of the shares of existing investors and their ownership of the company. Hence, you need to be aware of the dilution effect on the value of shares.

  • Understand Your Investment Horizon

Before investing, you first need to understand the development of funds at a particular time. There have been instances of price control in penny stocks. The key idea must be that your investment must match your particular objectives and should focus on insights.

  • Monitor All Your Investments Regularly 

While making investments in particular stocks, it is advisable to make a common fund review once in a while. You should check it to see whether its administration and execution are done as per your decided objective.

Key Takeaways

Some important points to keep in mind before investing in penny stocks are:

  • Pick stocks of companies from the OTC markets. This market trades in overseas markets and has stricter financial standards for listed companies.
  • Avoid the Pink Sheet Stocks. These stocks are more prone to manipulation as they are not listed in BSE, NSE, or any other stock exchange in India. 
  • Avoid the pump and dump stocks. Many OTC stocks are promoted based on false and misleading statements, ensuring a guarantee of high returns. But these types of stocks open in IPO and not in the penny stock market.
  • Keep away from low-liquidity penny stocks. 
  • Focus on trading and keep low on investing.
  • Know when to sell your penny stocks and get quick profits. Do not overtrade.
  • Before buying stocks in the business, learn more about them.
  • Trade for penny stocks with money that you can afford to lose.
  • Diversify your penny stocks in at least three to four different sectors.

FAQs

  • Can penny stocks be considered a good investment for the long term?

Ans: Penny stocks have a lot of risks attached to them. The price of shares can drastically change overnight. Hence, it should be traded the very next day of purchase if it looks good. Hence, it is not a good option for long-term investment.

  • Are penny stocks risky?

By default, penny stocks are considered risky. Many companies have risky business models that trade at low levels. They are likely to have minimal or no revenue and the growth prospects are also low.

  • How can you buy penny stocks?

Penny stocks can be purchased online from a broker’s platform. On the site, find the stock you want to purchase and then click on the buy button. 

  • Is it possible to earn money by investing in penny stocks? 

Yes, it is possible to make money through penny stocks. However, you need to understand the trading concept concerning penny stocks. How you make money here completely depends on how you trade. You must clearly understand when you need to sell the stocks, as not doing it at the right time might risk your loss. 

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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