If you are looking for stocks that require low capital investment, you should try your hand at trading in penny stocks. Penny stocks are common shares of small public companies that trade at low prices per share. In the United States, the Securities and Exchange Commission defines a penny stock as a security that trades below $5-per-share, is not listed on a national exchange, and fails to meet other specific criteria.
Don’t Listen to Hype -- Ignore the penny stocks that are touted on social media and in e-mail blasts. You have be smart about the penny stocks that you pick. You should focus on the profitable penny stocks with solid earnings growth and that are making 52-week highs.
Read Disclaimers -- Investors sell penny stocks more than buy them. When getting a newsletter, you want to read the fine print. The companies that give out free newsletters are getting paid to pitch a stock because their investors want exposure for the company. Almost all penny newsletters make false promises about horrible companies. You will see a difference between stocks making a 52-week high based on earnings and stocks making a 52-week high because three newsletters picked it.
Sell Fast -- Don’t go for a 1,000 percent increase. You won’t get it. Instead when the stock is reaching 20 percent return, it is time to sell. You can usually make your profits in a few days.
Don’t Listen to the Companies -- You are better off not paying attention to the public relations departments of the penny stock companies. The companies are trying to bolster its stocks so it can stay in business. Experts say that the same people run promotions using different press releases and companies, including the reappearance of a notorious stock manipulator who was arrested in high school.
Don’t Sell Short -- You might be interested in selling short stocks that are inflated. Avoid this option. Penny stocks are too volatile. If you’re on the wrong side of the trade, you could easily lose 50 percent or more on a short squeeze. It’s difficult to find shares of penny stock to short, especially those that made huge moves based on hype and newsletter tips.
Go for High Volume -- You want to pick stocks that trade more than 100,000 shares a day. When you trade stocks with low volume, you might not be able to get out of your positions. Pay attention to the number of shares traded and the dollar volume. Look for shares that are at least 50 cents a share.Stocks that are trading fewer than 100,000 shares a day and are under 50 cents a share are not liquid enough to be in play.
Buy the Best -- You want the stocks that have shown an earnings profit. Buy them when the companies have good earnings, or when they are breaking out to 52-week highs on volume that is at least a quarter million shares a day. The challenge is to find stocks that make 52-week highs that aren’t due to a pump-and-dump scheme.