Stacks of pennies made from penny stocks

How to Pick Successful Penny Stock Investments

When people dream of becoming rich, a popular scenario involves buying and selling stocks. However, for most people this is an unrealistic dream because stocks tend to be expensive. For those with dreams of hitting it big in stocks, but with limited funds, penny stocks provide a way to purchase stocks cheaply and potentially make a huge profit. While this sounds easy, there are many factors to consider when choosing a penny stock investment.

Do Your Research

If you want to invest in penny stocks, spend time researching the various companies you're buying. Buying and trading penny stocks involves quick decisions, bold moves, and understanding trading patterns. While there are plenty of legitimate penny stocks out there to buy, there are also plenty of scam artists.

When purchasing penny stocks, you need to remember that due to low market capitalization and liquidity, they are not regulated by the major stock exchanges. Very little information is usually available regarding these stocks, so you really have to dig deep to find out about them. Many times, it's a good idea to actually call up the company and talk to someone directly. It's also a good idea to follow a company's larger competitors, which can give you a good idea of how the penny stock company may be doing. Once you've found the stocks you want to buy, purchase them through Pink Sheets.

Look Out for Scams

As stated earlier, penny stocks are prone to scams. One of the most common penny stock scams is the "pump and dump." In this scenario, the stock's price is manipulated by planting false information about the stock's potential through phone calls, emails, and other forms of communication. When investors hear this, they start buying shares, sending the price up. The scam artists then sell their shares of the stock for a nice profit and watch the price tumble dramatically, leaving those who bought the stock at a higher price with a huge loss.

However, if you're a serious penny stock trader you can easily recognize the signs of a scam. The key is to watch the daily trading volume and time your trades accordingly. If the stock's price suddenly increases, then something is not quite right. But if the price increases in a normal fashion, and trading volume does as well, it’s probably a safe stock investment.

While there are plenty of pitfalls regarding penny stocks, doing some research and asking questions can take you far. By learning trade patterns and the best times to buy or sell, you can do surprisingly well in the penny stock market.

Last Updated: April 23, 2015