Penny stocks investing must not be done in haste. Investors must first understand the difference between penny stocks investing and traditional stocks investing in blue chip and mid-cap stocks. Investing in penny stocks is not same as investing in large cap stocks Reliance, Tata Steel, Infosys etc which are stable and very established companies. These large cap companies are comparatively stable and there prices has a low beta values (low sensitivity to market news), which means the volatility of large cap stock prices are low. Whereas penny stocks are traded literally in penny market prices and hence has high volatility. Generally long term value investors do not touch these stocks. The best thing about penny stocks is that in course of time, these stocks become mid cap stocks making their investors wealthy by a huge multiplying factor. Like in the year 2000 when Microsoft was first listed in stock exchange, its price was $0.89, which is now traded at $24 each (read more… invest in the stock market).
Penny stocks investing bring with itself their own risk paradigm. As the price of each share is very low, they are mainly traded by short term traders. Short term trading is not done with any fundamental analysis. Penny stocks are bought with only one purpose, to make quick money. Penny stocks investing are done with principle of buying low and selling high. Such high volatility is market price of penny stocks is both advantageous and ugly at the same time. If prices have a tendency to rise, it will rise exponentially, but if it fall the reverse is also true.
It is precisely this volatility of penny stocks investing which draws investors towards it. A good selection in penny stocks investing can make so much money (some times 100 times more) which is not possible with bigger stocks investing. There is little doubt that penny stocks investing is more risky than buying bank deposits, bonds, mutual funds and even large cap stocks. But this risk attached with penny stocks investing also makes huge gains possible.
Here we will discuss few ways which can be used by investors like you and me to make money form penny stocks investing. Penny stocks investors shall always be careful with form the developers of penny stocks. Many a times it has been seen that the developers starts to buy their own stocks in huge numbers. This stint of buying creates an euphoria in the stock market and subsequently retail investors (who are not very aware of companies fundamentals) starts to buy these stocks. Which results is sharp rise in the market price of these stocks. Ultimately when the prices rises very high, the same developers sell their holdings and make huge personal profits. As developers sell, the market price of stocks fall drastically making huge losses for retail investors.
The best strategy of penny stocks investing is to buy and hold this stocks when no one is buying. After buying keep an eye on the actions of the promoter. Time and again they use the ply as discussed above. Keeping a watch on promoters can result is huge rewards.
Technical Analysis of penny stocks can also prove very rewarding. Technical analysis at times shows great buying opportunities. In such situations, penny stocks has a high chances of moving up and a very chance of a price fall.
Fundamental Strength – Fundamental analysis of penny stocks investing is like digging a gold mine. Key fundamentals of business like its earnings, debt equity ratio, PE ratio, EPS, Book values are key indicators that shall be tracked. The best investment decisions can only be made by studying the financial statements of a company. This rule is not only applicable to blue chip companies but also to penny stocks.
If investors learn to combine fundamental analysis to penny stocks investing then this combination will be deadly. Investors will have chances of making three digits returns as a part of long term investment strategy in penny stocks.
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