Can You Make Money With Penny Stocks?
Penny stocks, by definition are stocks which are trading below $5.00 per share and which have a market capitalization below $200 million. The market capitalization is arrived at by multiplying the price of the stock by the number of outstanding shares. There are many different opinions on whether or not you can make money with penny stocks. Almost every opinion however, states that if you are going to try to make money with penny stocks that you should be extremely cautious and only use money you can afford to lose.
When investing in large cap or even small cap stocks, you have a legitimate history of how the price of the stock has done over time. You can do a pretty good job of evaluating both the technical and fundamental analysis of the stock. With penny stocks the technical and fundamental analysis may not be readily available. Some times the company is nothing more than a start up company with a dream. They are promoting themselves as the next Microsoft as soon as they get a viable product. You should definitely stay away from any company without any legitimate sales.
When trying to make money with penny stocks you should never invest in companies not listed on a major exchange. That means that you stay away from the pink sheets or over-the-counter stocks. You should also stay away from those stocks that come recommended by e-mails or some other promotional method. These are prime targets for pump and dump schemes. The company should also have at least 10 million is sales. This would indicate that it is a legitimate company that is capable of making a profit.
Compare the price per share against the book value per share. Only buy companies that have a very low multiple on their cash value and limit your stock purchases to five percent of your portfolio. That way you will truly be investing with money you could possibly lose.
Another tip is to investigate the amount of debt the company is carrying. You should only invest if the debt to equity ratio is low. An investigation of what the insiders are doing is another tip to consider. If they are dumping the stock, then that is a red flag for you.
If you are going to try to make money with penny stocks, you will need to do a lot more homework than with any other kind of investment. You are going to need to watch the stock by the hour and be willing to dump it at the first sign of trouble. Some advocates even suggest that in trading penny stocks that you need to become a day trader. If you are unable to do this, then investing in penny stocks is probably not for you.
It is possible to make money with penny stocks but the risk is high and the returns are unstable. There are probably more safe investments to make. However, if you are a person who thrives on risk and want to give it a try, then go for it. However, be aware of the risks and by all means do your homework. Be picky and maybe only choose one of a hundred stocks that look interesting.
Give your ideas some legitimacy by tracking a potential investment and see how you would have done. Then after you have traded several different stocks and feel you have a good trading system, then you are probably ready to try it with real money. Be careful and start with a small amount of cash. The ride may be fun and you even may make some money by investing in penny stocks.
