Investing in Penny Stocks for High Returns

Investing in Penny Stocks for High Returns

Posted on 11. Jul, 2010 by in Stocks

Investing in penny stocks is a great option for many people for a variety of reasons.  They are very affordable stocks to purchase, hence the name.  Contrary to popular belief, a penny stock is not a stock that sells for less than $1.  Rather, it is any stock that sells for $5 or less.

With penny stocks, a small movement in price could equal a large return for the investor.  For example, if you buy a stock priced at just $1 and it increases in value by $1, you’ve doubled your money.  With a blue chip stock, for example, a $1 price increase wouldn’t result in much of an increase in the stock’s value.  Such price movements with penny stocks are very common.  Many people who invest in penny stocks try to look for stocks that are making a simple, rolling pattern and buy them when they are at an easily defined low point.  They will then sell the penny stock when it reaches the top of the rolling pattern.  Rinse and repeat.

Now, having espoused the virtues of penny stocks, there are some things you should be aware of if you are considering penny stock investing.  First, these stocks are inexpensive for a reason.  They may be new companies or companies that truly are undervalued.  Be careful.  Just because a stock is inexpensive doesn’t necessarily mean that it’s a good investment.  Take time to research the company and its history.  What is their line of business?  How long have they been in business?  Do they have growth potential.  If a company’s history doesn’t look too great, pass on it.

Another thing you should consider with penny stock trading is the stock’s trading volume.  Does it have a high enough volume to make it worth your while?  If hardly anyone ever buys or sells the stock, it might be hard to unload if your position suddenly goes south.  In such a case you might put in a sale order but if no one’s buying, you might be stuck with stock for awhile as it continues to lose value until there’s a buyer.

Beware of the pump and dump with penny stock trading.  Because penny stocks have the potential to dramatically increase in value with a small move in their price, there are some people who take advantage of this by “talking up the stock’s price.”  Basically, what this means is that someone will start  saying a lot of great things about the company, whether it’s true or not, to increase the stock’s price.  The same person who is making these bold claims bought the stock when it was at a low point.  The big talk about the stock causes others to take notice and they start buying, causing the stock to rapidly spike in value.  After the stock’s price quickly reaches a high point, the person who did the big talking will sell his position and stop talking about it.  The stock’s value is then quickly corrected to reflect its true market value.

If you see a sudden and dramatic increase in a penny stock’s value, it could be the result of a pump and dump scheme.  Be very careful when you see this.

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