If you’ve recently decided to enter the stock market, you now have an important task to work on if you want to reach your financial goals: create your trading plan according to your personality and level of risk-aversion. This trading plan needs to include any information you need to organize and plan your trading routine, as well as to open, close, and manage your positions. Determining which kind of stocks you’re going to invest in, and in which sector, is essential to narrow down your watch list and select the best stocks for your trading.
Penny stocks, also called microcap stocks, are one increasingly popular type of stock among retail investors, especially those with small capital and high-risk tolerance. Penny stocks, which are usually worth less than $5 per share, represent small companies. They can be either relatively new companies in trendy sectors, such as biotech, cannabis, or cyber-security, or they can be formerly large companies whose stock prices have since tumbled.
Some of today’s largest companies were once penny stocks. That’s why many investors consider adding penny stocks to their investment portfolio. By investing in penny stocks, they are potentially buying shares from small companies that might develop a product or service that will propel the company’s value through the roof, making them rich. Medifast, Inc., Ford Motor Company, General Motors, Xerox, Sirius XM Radio, Alcatel-Lucent, Monster Beverage Corp., Pier 1, Apple, Amazon, and Blackberry are just a few examples of well-known companies that were once penny stocks.
But while some small companies will become big and successful, most penny stocks won’t. However, the high volatility and the low trading volume characterizing these stocks could help investors make quick gains from a relatively small initial outlay of capital. The more volatile a stock is, the riskier it is and the greater the opportunity is to make a profit (or lose money if the market swings against you). Low trading volume means that any trading position could trigger an important price movement that investors can take advantage of. It is especially true if you’re an active trader with an aggressive strategy, such as scalping or day trading.
Bottom line
Penny stocks are popular for traders wanting to invest in companies with small but volatile share prices, paired with promising growth. To spot great penny stocks, analyze their stock performance and focus on high volume – you don’t necessarily want to put money into stocks with the lowest volume, as this is harder to sell later on down the line.
You should also be aware of news catalysts that can affect these penny stocks. Another great advantage of penny stocks is that they are different kinds of sectors you can invest in, from renewable energy to biotechs and cybersecurity. But while penny stocks can provide great opportunities, they’re also risky investment vehicles that are not for every type of trader. That’s why you need to be sure they fit your trading style before you add them to your portfolio.
