Things To Scrutinise Before Investing In Penny Stocks
Investing in penny stocks can fetch a good return if investment is done after market research. Though it is accepted fact that penny stock is very risky, it is equally a great platform to earn money. Unlike other normal stocks which trade on regular stock exchanges, pennystock is done on the over the counter bulletin board. The lack of proper reporting, rules, regulations etc. have led to several issues. Before you take a leap into this highly volatile market, it is worth to understand the following factors:
Value is more important
Penny stocks are low priced. This means that for a given amount you may get larger volume of stock but at lower price per share. When you invest in some power stocks the volume tends to be very low. You must look into the number of shares and its total value rather than the individual share price. Only then you can pick the best of stocks.
Volume versus liquidity
Always choose stocks that have greater volume on the trading segment. Many of the penny stocks are traded at lower volume. This can be dangerous situation in case you wish to sell. The stocks that you wish to sell must be traded in high volume or you will not get buyers for the same. Look for stocks that trade in higher volumes.
Circuits-high and low
Every stock will have a higher circuit or upper circuit and lower circuit. A pre-set percentage is fixed for both upper and lower circuit. The price of the share will not increase above this circuit. Similarly, the price will not drop beyond the lower circuit price. You as an investor must be aware of both these prices of stocks. Only then you can sell and buy the pennystock at the right time.
Lack of reporting and regulation from the SEC has led to several scams in the system. Volume of trading is low and so the prices can be influenced by the brokers. You must look for doubtful stocks by thorough analysis. In case of stocks that are always touching the upper circuit for no reason then it shows signs of manipulation. Look out for such aspects while investing in any penny stock.
Success and failure
Just like you hear stories of trader becoming rich overnight in penny stock, you must be aware that there are also loser and paupers in the same segment.