Main Opportunities and Risks of Buying Penny Stocks

There is a huge number of multi-billion-dollar companies that once were trading at one dollar per share. People who invested in these companies such as Monster Beverage, JD Sport, or Ford made a lot of money over time. Every company has its penny stock days, and this article will inform you about everything that you need to know about penny stocks. It will also allow you to understand how to buy penny stock by finding the right opportunities.

The following companies (which either are or have traded as penny stocks) are some of the best penny stock examples:

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  Ford Motor Company

  Ford Motor Company might be the last of the names when people think about penny stocks. But it indeed once traded for less than two dollars a share. It happened when General Motors was about to bankrupt.

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  SIRI (Sirius XM)

  SIRI (Sirius XM) is one of those companies that very recently got out of the penny stock territory. Somewhere in the middle of 2020, the price range of the company was between 3.14 to 4.04 US dollars.

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  Pier 1 Imports

  PIR (Pier 1 Imports) is still traded as penny stocks. In the last 52 weeks, its lowest price per share was 3.00 US dollars, with 3.90 US dollars as the highest. Invested traders can still buy stocks for pennies despite the fact that the net worth of the company is over a billion US dollars.

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  Monster Beverage Corporation

  Monster Beverage is one of the most popular examples as it was traded as penny stocks back in 2002. Now, as the company grew with the passage of time, the company now values more than 22 billion US dollars. Moreover, the price of its share is somewhere between 130 to 150 US dollars.

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  Fannie Mae

  Interests traders can still buy shares of Fannie Mae for 1.76 US dollars. The company was established back in 2008, but it is still traded as penny stocks. Although, the prices of their shares have become more respectable in the last few years increased from cents to a couple of dollars.

Some of the best platforms available for penny stocks are as follows:

• Charles Schwab

  

  

  Review

  Charles Schwab is one of the best platforms that allows its users to access trade penny stocks via several exchanges such as pink sheet, over-the-counter markets, etcetera. The company offers applications for both mobile and desktop devices that are not only user friendly but also time effective. The best thing about this platform is that there are no minimums of recurring fees and also no commissions. It offers the following features:

  ● 0 dollars commission for stock trades

  ● No recurring fees or account minimums

  ● User-friendly desktop and mobile applications

  ● Allows to trade multiple OTC and also pink sheet stocks

• Fidelity

  

  

  Fidelity Review

  Fidelity offers both mobile and desktop brokerage accounts. With this application, there are no commissions, no recurring fees, and no minimum deposits. It also offers Active Trader Pro which is the company’s flagship trading platform. Additionally, the mobile app offers an easy and seamless penny stock trading experience, and it offers the following features:

  ● 0 dollars commissions

  ● No recurring fees and no-account minimum

  ● App support for multiple devices

• Thinkorswim by TD Ameritrade

  

  

  Review

  TD Ameritrade is yet another excellent choice to perform penny stock trading. It also comes with no commissions, no recurring fees, and no minimum for non-OTC trades. However, the customers of this platform have to pay about a 6.95 dollars fee for OTC stocks. The company offers app support for both the mobile and the desktop, and it's known as the best platform for passive investors and beginners. Keep in mind that Charles Schwab has acquired TD Ameritrade, and the process is in progress. It's important to keep in mind that both of these platforms will work as one in the near future. For now, TD Ameritrade offers the following features:

  ● 0 dollars account minimum and no account fees

  ● Two trading platforms

  ● No online stock trade commission

• TradeStation

  

  

  TradeStation Review

  TradeStation brokerage is specifically designed for experienced, expert, and active traders that come with an ideal platform for penny stock trading. There are a couple of account types TS Go and TS Select, and both of these are commission-free. However, the clients using the TS Go account on the desktop application will have to pay 10 US dollars per stock trade. Moreover, it is also important to bear in mind that an investor needs at least 2,000 US dollars to get started with their TS Select account.

  It comes with the following features:

  ● No account fees

  ● Designed for professionals and experts

  ● Provides its customers with advanced data feeds

  ● A couple of account types

• ETrade (E*TRADE)

  

  

  ETrade Review

  E*TRADE doesn't even require any constant activity to avoid monthly charges because there are none. There is also no account minimum and commission on stock trades. However, the clients have to pay 6.95 dollars for OTC stock trades. Moreover, if a client achieves 30 trades per calendar quarter, then this fee decreases to 4.95 dollars. The clients of this platform can also access TipRanks, Thomas Reuters, CreditSuisse research reports.

  E*TRADE offers the following features:

  ● No account minimum and account fees

  ● The mobile app that suits both beginners and expert traders

  ● Offers a wide range of research material

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  Avoid scams

  Investors must consider the following points as red flags if they’re promised to get high returns at a very low cost. It will allow them to avoid penny stock frauds and scams.

  ● If penny stock offer is received through unofficial promotion or anonymous email

  ● If the offer is forwarded via telemarketing calls

  ● If the promotion is vague and doesn’t provide clear information

Any investor using an online platform to find penny stocks must make sure that the platform offers the following features:

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  Short Selling

  Some online platforms don’t allow short selling to their customers in penny stocks. The companies usually portray it as a risk management feature. That’s because they’ll need to maintain higher margins otherwise.

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  Platform Must be Responsive

  The responsiveness plays a vital role in any type of online trading. That's because if there is any delay in the application or website's functionality, an investor can face a jarring change in price. That's because of the highly volatile nature of penny stocks. This way, an investor might end up buying the stocks on the prices they didn't want.

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  There Must be Built-in Tools

  While trading, it’s important to keep in touch with the latest market trends. If a platform doesn’t offer enough research material and searching tools, an investor won’t be able to find the right penny stocks to buy.

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  Step One: Open Account

  The first and the most obvious step is to open a trading account on the platform. The account set up guide will help the user understand how the platforms really work and how they can further use it to get started with trading.

• 2

  Step Two: Research

  The second step is to perform comprehensive research to find the right stock. It’s advisable to use the tools that an online platform offers to find insights and news. Many platforms also offer analysis and news sections that allow the users to understand their penny stock trading efforts.

• 3

  Step Three: Make the Decision

  After performing the research, an investor should decide whether they want to buy or sell. Based on the investors' trading strategy, it's important to determine exit and entry points. Depending upon the research, find out whether it better to go short and sell or go long and buy.

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  Step Four: Risk Management

  It’s important to follow the guidelines to find your penny stocks to make sure that you are making informed and intelligent decisions. It’s recommended to consider risk management as an essential part of your penny stock trading strategy.

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  Step Five: Determining the Position

  Before placing the trade, it's advisable for the investor to determine their position. It's also better to apply for risk management orders like take-profit and stop-loss before confirming the trade.

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  Step Six: Monitoring the Position

  Once the trade has been placed, an investor must monitor their position before closing the trade. If the trade is going in the profit, consider sticking with the initial trading plan, and when the target price is reached, close immediately.

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  Uptrend Industry or Sector

  It's important to only choose those companies or sectors which are currently in an uptrend in the whole marketplace. Because of the very small prices of penny stocks, they don't lend to short trading. Moreover, investors can find it really hard to sell their stocks if they are caught up in a short squeeze as there are always very few buyers.

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  Learn About the Stocks

  In order to make sure that a company is worth investing in, investors must access the exchange and securities commission web portals. It will allow them to figure out if a certain stock has recently been delisted from any of the major exchanges or not.

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  Acquire Most Recent SEC Filings of the Company

  Finding the most recent SEC (Securities and Exchange Commission) filing will allow the investors to figure out the overall financial health of a company. These filings can easily be acquired from any free financial data provider.

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  Find Out How the Company Earns

  The financial reports of a company tell everything about how the company earns and how the board of directors and executives are managing any certain company. It’s also important to check if there is a daily minimum of 100,000 traded shares volume or not.

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  Choose the Company with Daily Minimum 100,000 Traded Shares Volume

  Investors must make sure that the company they choose has no recent history of being delisted from any major exchange. Moreover, the company must also have enough cash to maintain and easily run its day-to-day operations that make money as well.

  Learn Best Stocks Under $5 according to Traders Union.

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  Lack of Information

  It’s imperative to obtain enough information before buying penny stocks in order to make a more informed and wiser decision. Most of the time, it’s not easy to find enough information about the business and its overall performance. Moreover, the available information about the new businesses traded as penny stocks is also not credible.

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  Low Performing Companies

  As mentioned, penny stocks are typically associated with new and small businesses. It is also quite possible at the same time that a company with penny stocks isn't performing well in the marketplace. That's because if a company is performing well, the value of its stocks rises, and they only fall in value if the company is performing poorly. Therefore, almost all successful companies usually offer shares at a higher price. In simple words, the penny stocks universe involves only those companies that are performing poorly or that haven’t performed well yet.

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  No Minimum Standards

  The stocks on the pink sheets or OTCBB (Over-the-Counter Bulletin Board) don’t need to meet any minimum standard requirements in order to sell via OTC (Over-the-Counter) exchanges. These minimum standards work as a safety cushion, and without them, the investing experience is a lot riskier.

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  Lack of History

  The lack of history and the necessary information makes it very difficult to find the potential of a stock. The companies which are traded as penny stocks are either approaching bankruptcy or newly formed. So, there is no track record at all or a poor one. It makes penny stock trading even riskier.

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  It’s a Game of Chance

  For most people, investing in penny stocks is just like buying a lottery ticket. In simple words, investors who deal with penny stocks without informed decisions take the chance that either they will win big or lose everything. On the other hand, investors with due diligence don't consider dealing with penny stocks as a gamble. They only buy and sell penny stocks when the odds aren't against them. Performing comprehensive and detailed research work allows them to understand which penny stocks to consider and which to avoid. But the fact of the matter is that it's still like playing at a casino.

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  Low Liquidity

  Infrequently traded stocks normally have the least liquidity. Therefore, an investor may fail to sell its penny stocks after buying. In order to sell the penny stocks, an investor must lower the price to attract other people, which can result in a significant loss of money.

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  Price Manipulation Scams

  Another factor that makes penny stocks riskier is the price manipulation scams, as they're traded very thinly. Because of the very low prices, they can easily fall victim to price manipulation. Many people use the pump and dump scheme to attract investors to buy penny stocks. Once the stocks rise because of the hype, the scammers sell the shares, and they immediately lose their hyped value as there was no solid reason for a higher stock price. Any investor without comprehensive due diligence can lose a lot because of this price manipulation. But the good news is that these pitfalls can be easily avoided with a little research.

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  Low Price

  As penny stocks are very low priced, some people trade them for even a fraction of a penny. In such a situation, if a scammer succeeds in pushing the price from two-tenths to four-tenths of a cent, they simply doubled their investment.

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  Thinly Traded

  As there is a very lower number of traders for the penny stocks, it's easier to move the price. That's why any significant purchase can increase the stock price, and after being sold, it drops dramatically.

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  Plentiful

  There are tens of thousands of penny stock options. A scammer can choose any firm or story to push in order to raise the stock price.

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  Anonymous

  Most of the scammers usually stay anonymous. They never poke out of the hiding even after scamming people through penny stocks.

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  Misleading Information

  Whether through a fake telemarketing call or a free email newsletter, the scammers understand they don’t exactly need to trick all the investors. They smartly pick their targets as a bunch of unwary beginners are more than enough.

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  Talk About Potential

  The scammers never talk about the facts that how a company is literally generating zero revenue and about to go bankrupt. They trick the investors by only focusing on ridiculous potential.

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  The Champions of Tomorrow

  As mentioned, the Ford Motor Company once traded as penny stocks. That’s why the penny stocks that you buy today can be worth so much more in the future.

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  Excitement

  An investor who earns 10 percent in a year from a penny stock understands how they can earn big by trading penny stocks.

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  Can Turn Small Investments into Big Ones

  If an investor purchases 1,000 shares for 500 dollars and a shared doubles its value, it simply means that the investors earned 500 dollars. It can actually happen within days.

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  Speed

  Although not all penny stocks experience very quick movement, some of them do. As mentioned, an investor can double their money within days.

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  Exela Technologies Inc

  It’s a globally renowned company that offers payment processing, print communication, digital mailrooms, and workflow automation. It lost about 28.3 million dollars, which is still an improvement as earlier it lost about 131 million dollars. But the share price is increasing.

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  9F Inc

  It’s a China-based IT organization with a well-developed online shopping store. This company is also a good value. It’s expected that the share price of this company will increase in the near future.

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  Conduent Inc

  This company specializes in transaction-intensive automation, analytics, and processing. It lost 7 million dollars in 2020, which is an improvement as compared to the earlier loss of 16 million dollars. Buying its penny stocks can be a wise decision as the price per share is increasing.

• 1

  Don’t Use Margin and Control Your Risk

  It’s never advisable to use margin in order to purchase penny stocks. It means that you must not borrow money from the bank or any other source because it can cost you even more than your investment. Moreover, it’s vital to perform all the risk management practices to find the best penny stock with the least risk.

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  Remember Volatility

  Penny stocks are highly volatile. It can either result in a complete failure or in a high reward. Keep in mind that the money you have spent on the penny stocks can go in vain entirely. So, it’s better to spend the money on penny stocks that you can easily spare.

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  Diversify Your Portfolio

  Just like other types of investment, diversifying your penny stock portfolio is also important. According to some professionals, it's enough to confine your bets to 15-20 stocks, but others say that it should spread over 100 stocks. It’s a subjective matter, but diversification is very important.

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  Don’t Short

  Shortening the pumped-up penny stocks undoubtedly seems exciting, but it's not a good practice. Keep in mind that they are too volatile, and it's just a matter of falling on the wrong side that breaks everything. So, unless you're a pro, shortening is never advisable.

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  Provide Deep Market Research

  Just like any other investment process, it’s important to understand the ins and outs of any company you want to invest in. Avoid buying the penny stocks of any company if you’re unable to explain the company’s nature in a single sentence.