Penny Stocks: The Basics

Updated on March 17, 2019

Penny stocks are riskier than other stocks in the stock market. For this reason, it’s vital to understand the basics before you can start investing in them.

Don’t worry though because you’re in the right place. This article will delve into the basics you must keep in mind when investing in penny stocks.

1. Before Starting

After hearing the success stories of various investors and how they made millions in the stock market, you may want to dive right into the game. However, this is one of the biggest mistakes many investors make and results in a total loss.

Paper trading is the best way to get your feet wet in penny stocks. This technique allows you to use virtual money to trade. Since real money isn’t on the line, there’s no need to make impulsive or rash decisions which may jeopardize your trade.

2. Sidestep the Common Risks

Similar to any business out there, you’ll encounter risks in penny stocks. Nevertheless, the best way to overcome these risks is by understanding them in the first place.

One of them is penny stock promoters who’ll siphon funds out of your pocket, make profits from them and leave you to dissolve in the heat of agony and frustration. To overcome this, do your own research about the penny stock companies and then act.

Another risk is making emotional decisions. This is similar to chasing losses while betting. Often, this is as a result of obsession, impatience, and frustration coupled with stress. This will only lead to poor decisions and results.

Another risk is following penny stock promoters blindly. These guys are paid to hype a certain stock and one of their main tactics involves lying. Of course, you can find reliable promoters but tread with caution.

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3. Do Your Own Research

This applies to not only the blue-chip companies but also real estate, bonds, and penny stocks. A good investment is one with the potential to increase in value over time. The best type of investments usually hides in penny stock companies since they are new.

It’s even better if the company is a growing industry. This is because growth in the industry will result in the overall growth of the companies in that sector, which will also reflect in the share price.

However, finding stocks with such potential growth can a painstaking affair. This is where your skillset will come in handy.

4. Find a Stock Broker

After finding your way in the stock market through paper trading, it’s time to start trading with real money. For this, you’ll need an online stock broker and in particular an online discount broker.

To open an account, you’ll need to fill certain forms and if everything checks out, you’ll start trading within a few days. Nevertheless, you have to keep in mind these online platforms will vary from one broker to another.

The same variation extends to policies with some brokers requiring a minimum amount to open an account and could be anything from 0 to thousands of dollars. To start trading, you must deposit money into your account.

There you go. Some basic information and tips before trading penny stocks. Also, remember to invest wisely by doing your own personal research. Once you make some profits in the stock market, you’ll be addicted to success.

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