Also known as a “microcap stock,” penny stocks are traded at a very low price per share — typically under five dollars, and sometimes even less than a dollar. Most often, these stocks are shares of companies that are new to the market or not yet well known.
While the name “penny stock” implies that they’re a fairly cheap investment option, it’s not as simple as that. Penny stocks can suddenly balloon in value, resulting in a great profit for the investor, but they can also drop suddenly and without warning, wiping away the money invested in them. As with any investment strategy, it’s important to do your research before you invest to ensure you’re making a smart decision.
If you’re interested in investing in penny stocks, use this guide to determine the best penny stock options that are right for you and your investment budget.
Table of Contents
1. Research Penny Stocks
Penny stocks might seem like a simple investment strategy to grasp due to the apparently low stakes, but that doesn’t mean you should skip out on conducting your research. It’s important to research the shares you want to invest in, especially considering the fact that penny stock investments are most often stakes in shell companies or other scams looking to sell bogus stocks.
The platform the company is using to trade stock is highly indicative of whether they’re legitimate or not. Penny stocks sold on the dark web are usually a scam, but those traded through a vetted online brokerage service or through a traditional broker are often legitimate.
To carefully research penny stocks, investigate factors such as a company’s revenue, as well as their past stock performance. This will give you a good idea of how established they are in the market and what their projected growth is.
Also, pay attention to details like their management team. Do they have experience working with other small companies or startups? Have they seen success in the past? Getting to know more about the team behind the company you’re investing in will give you more insight as to how successful your investment might be.
2. Figure Out Your Goals for Penny Stocks
As with any kind of investment, it’s important to establish goals for your penny stocks. You should have a clear idea of what you hope to achieve out of investing in penny stocks. Make sure you understand exactly how penny stocks fit into your overall investment strategy.
Keep in mind that these stocks are issued by small, often unestablished companies that present a chance for you to earn a substantial return, but with a strong possibility that you could lose a significant amount of money. Generally speaking, investing in penny stocks should be a short-term investment strategy, not a long-term one.
It’s most important for you to do your own research to figure out whether penny stocks can live up to your personal expectations.
3. Figure Out How Many Penny Stocks to Buy
To determine how many penny stocks to buy, start by considering how much you’re willing to lose. When investing, you should never invest more than you’re comfortable parting with.
Consider these factors when you want to decide on how many penny stocks to buy:
- Budget: The amount of money you have to put towards investments will always be a factor.
- Passion: Understanding what the company you’re investing in does could be a big determining factor, especially if it speaks to one of your passions, like eco-friendly fuel or protecting wildlife.
- Risk: There is always a risk of investing, including penny stocks. Having an understanding of the risk associated with the company you want to invest in should weigh on your decision of how many penny stocks to buy.
- Portfolio: The current state of your portfolio is an important factor in determining how many penny stocks to buy. Consider how many penny stocks you can purchase while still maintaining a diverse portfolio.
4. Figure Out How Much You Want to Invest in Penny Stocks
The next step in investing in penny stocks is determining how much you want to pay for the penny stocks you’re investing in. You can choose to pay the market price for the penny stocks or find them for a lower price elsewhere.
If you’re okay with paying the market price, you can use a market order, which is an order to buy or sell a stock at the best available price. If you want to wait for prices to fall lower, you’ll need to buy penny stocks through a limit order, which signals the purchase of a stock at a specific price or better.
Once you’ve done your research and carefully considered your goals, how many stocks you want to purchase, and the price you want to purchase them at, you’re ready to buy shares of penny stocks. Below are the ways you can buy penny stocks.
Online Brokerage
You can find many reputable penny stock trade brokers online, including Fidelity, Charles Schwab, and TD Ameritrade. Note that investing through a broker will often come with a surcharge, especially with investments that cost less than a dollar. The fee will vary by broker, so be sure to look into that prior to investing. Additionally, certain brokers will have restrictions on the number of penny stocks you can buy or trade in a day, so pay attention to that as well.
Financial Advisor or Broker
Financial advisors and stockbrokers can help you find the best deals on penny stocks, as well as serve as an advisor into which stocks are worth the investment and which are not. Be mindful of the fees that come with using a financial advisor or stockbroker to help you with the purchase of penny stocks, as they can sometimes be quite substantial. Often, it’s based on the number of shares you’re looking to buy, but conduct your research to find out whether they charge a flat rate or base their fee on your return.
“Over the Counter”
Purchasing over-the-counter (OTC) stocks is different from purchasing through traditional stock companies on the New York Stock Exchange because OTCs are unlisted. In the OTC market, there is no central exchange, which forces orders to be made directly between buyer and seller.
Have a clear understanding of your budget and your goals before investing in penny stocks. With the right amount of research, you’ll be able to make smart decisions in your penny stock investing strategy.
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