3 Ways to Make Money from Penny Stocks

December 24, 2015

8:00 pm

Penny stocks, a conglomerate of stocks which each are valued at less than $1, are typically seen as a more risky gamble when it comes to investing in stocks. The balance of the risk and reward of penny stocks is more dramatic than typical, less volatile stocks. However, by accepting more risk, an investor has a potential for larger gain. Contrary to their name, these small-cap, low-priced stocks rarely cost a penny. The SEC qualifies any stock under $5 to be a penny stock. This seems unusual to some – given that there are stocks under $5 trading on big exchanges like NASDAQ. Despite their volatility, trading penny stocks can be extremely lucrative. Here are three ways that you can profit from investing in penny stocks.

Find a Rising Company

The good news about penny stocks is that you can buy a good amount of shares without going broke. It’s thus easier to get a good stake in a company for less than you would pay for stock of a larger organization. To find a company that you feel confident investing in, make sure to do your research. Don’t just choose a company because you saw an article about it, or because your friend is investing in it.

Making wise decisions on penny stocks starts with investigating the company selling the stock. Is the company on a path towards success? Do they have viable metrics indicating a promising future? Do you believe in the product, and in the vision of the company? What about the people? Does the CEO have a track record of success? These are questions you need to ask yourself and figure out before buying any shares.

Sell Quickly, Not Short

One of the allures of penny stocks is the idea that you can make 30 percent or 40 percent profit in a few days. The best strategy, if you do have experience type of return on a penny stock, is to sell the stock quickly. Of course, it’s easier said than done. The natural thing to want when you see an increase in stock price is to hold the stock and hope for an even larger increase. If rolling the dice once wins you a thousand dollars, why not roll it again? Of course, gambling in this sense a second time begets a logical fallacy. Being greedy and aiming for a larger return when you have already achieved a good return can hurt you in the long run. Take what you can get and move on. The poker term is “walk away when you’re up.” Rather than shooting for the stars, accept a win when you get one – however small it may be.

Along the same lines of selling quickly, you also want to make sure you're not selling short. While it may be enticing to short a pumped-up penny stock, try to stay away from doing so. Penny stocks – being highly volatile – can incur losses north of 50 percent on a “short squeeze,” if you’re on the wrong side of the trade. Also, it isn’t always easy to locate shares of penny stock to short, especially those which already surmounted large milestones and attention. Shorting is difficult and is typically used by those with lots of experience.

Don’t Let Emotions Get in the Way

As a company selling penny stocks, the company will naturally want its buyers and investors to believe that the stock is extremely valuable. In fact, many companies will go as far as conjuring stories to make people think that they are going to be the next big company. They will use marketing to spread ideas of growth and prosperity – in order to artificially jack up their share price. In these situations, it is important to be objective. Don’t let the company hijack your emotions and make you believe in their falsely inflated value.

The best way to avoid emotional reactions when it comes to penny stocks is to be cynical by judging and evaluating the share price and potential. The offer of getting rich by clicking a few buttons and investing a small amount of money into shares is often an enticing one. Companies now how to play to the interests and fantasies of buyers; they know how to position their offer in such a way that will seem lucrative and advantageous to buyers. Thus, before placing any trade, make sure to use scrutiny when looking over the facts.

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AJ Agrawal is an entrepreneur, speaker, and writer. He is the CEO and Co-Founder at Alumnify Inc.