Penny stocks are high risk investments, any form of investors both retail and institutional should walk the extra mile to get additional information of companies before putting their money at stake. The prices of penny stocks have been manipulated over the years and even as regulators keep a strong vigil, the prices continue to get manipulated by rumors. There are certain basic principles that must be kept in mind before looking to invest in penny stocks.
It is very essential to clearly demarcate the risks that are associated with a penny stock. Due to lack of information investors should look to seek the one stock that has the lowest risk attached to it keeping other factors constant. It is also very important to price the risk and determine whether the risk taken will be adequately rewarded as the share prices rise. It is not worthy of pursuing a risky venture if the expected returns from such a move is meager.
Once the risks have been identified there are other checks that the investor must put in place. It is quite probable that the current price of the stock is exaggerated and does not depict the true picture. Investors should look out for such signals by performing a technical analysis along with a fundamental analysis. Historical news about the movement of stock prices of the company can be helpful in explaining the current market price of the share.
Once a thorough analysis has been performed, it is essential to understand the purpose of investing in penny stocks. More often than not, the primary reason for putting money in these stocks is high returns. Irrespective of the motive, investors should have a definite strategy in mind while investing in penny stocks. At times things may not work out accordingly to plan but there is no reason to panic if the analysis suggests that the stocks continue to remain a safe bet. Panic selling is a common feature of these stocks as most investors look to book immediate profits but a sound investor will not fall prey to the market outcries.
Investors should also look to invest in penny stocks that have chances of breaking out. Now there are numerous reasons why the price of these stocks may rise suddenly. Beating market expectations, launch of new products and pump and dump strategy are a few reasons that have been responsible for breakouts in the past. Investors should look out for pump and dump strategy as this does not reflect well on the soundness of the company.
A fundamental law of investing in equity markets is that one should not be too biased towards a particular share. As an investor, it is essential to book profits and not cling onto a stock based on one’s intuition. Some people have the knack of holding onto a stock that has already witnessed a considerable rise. This strategy can ruin the effort that was put in before the investment decision was made.
Penny stocks are extremely volatile and extra caution in required along with meticulous planning. Investing in penny stocks definitely requires considerable effort and time. How well people apply the fundamentals of equity investment will be the determining factor in the long run.