Featured # Editorials | 1 year ago

Nasdaq Stocks: The Formula of Making Money in Penny Stocks

Since penny stocks have a lot of risk, people do not like to invest in them. However, penny stocks can be a game changer because of one thing: fluctuation.

Volatility, or fluctuation, can see a stock jump from $0.08 to $8 in only two weeks. Many people think this is why they play with penny stock. However, how do you find the right penny stock to buy? How can you make money? And above all, how can you find the right ones before they rally? We shall discuss that later, but first, we need to know what penny stocks are.

So what exactly are penny stocks?

They are low-priced, small-cap stocks. While they cost a penny, they are one of the cheapest in the market because they can all be bought for less than $5. They can make a lot of profit, but gains and losses from them are not discussed publicly. So where can you buy these stocks?

How to find penny stocks?

It is not difficult to find them if you buy them through a stock broker. It doesn’t matter if it is listed on major exchanges. However, you need to be cautious about choosing a stockbroker. For example, their trade surcharge. They usually surcharge stocks valued at less than a certain amount, though this threshold varies by the broker. Some think stocks under $5 are penny stocks, others cut off at $1 or $3. It usually involves a large number of shares, so avoid brokers who have surcharges and look for those who have flat commissions.

You should think about volume restrictions as well. Great penny stocks don’t charge you extra for unlimited shares, but some do for large orders. Also, brokers limit the number of penny stock you trade in one day, and slows your trading and forces you to pay another commission.

Finally, take trading restrictions into consideration. Don’t deal with companies that ask you to place phone orders or limit types of trades for you. Your broker should allow you to trade the exact same online form.

How to find penny stocks before they rally?

Now how do we find penny stocks before they rally? First you need to accept the fact that there are new companies starting every day and some will go public immediately which causes there trading one the smaller exchanges. While they can be profitable, investors don’t have the time to analyze them.

That’s how you can be successful. You must look out for the diamond in the rough. It’s hard to predict if a company can be successful, but few people reap the benefits of new companies because they don’t know too much about them. So you must see their history as well as their potential. You will need to do research to prove your intuition and rely on your resources to get the right info.

How to make profit from Penny Stocks?

You need to consider three things. One, search for underlying business. The underlying business is more important than the company itself because they are perfect for “pump and dump” stock methods. Avoid those and look for real, sustainable business.
Two, pay attention to the financials. They are important tool for investors. But many only focus on the quality and not whether it’s on time. Make sure the financial is healthy and figure out the auditing firm.

Three, look for footnotes. We tend to over look them even though they are important part of filings. Sure you can get by without reading them, but you might just miss important information. Things like part transactions and non GAAP accounting oddities can be crucial.

The takeaway

Penny Stocks are risky, but there are scenarios in which it can make you a load of money. They are popular investment for risk taker, but you need to do your research.

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