3 Smart Strategies for Trading Penny Stocks

When it comes to trading penny stocks, luck alone isn’t going to bring you big returns. You need to focus on specific strategies that will help you minimize your risk and maximize your profits. Fortunately, traders have developed some tried-and-true methods for investing in penny stocks successfully. Explore the following three smart strategies you can consider.

Research, Research, Research

3 Smart Strategies for Trading Penny Stocks

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Many penny stocks represent small or newly established operations. This characteristic is one that makes these stocks potentially risky investments. They likely don’t have high sales and can go under easily. However, if you do your research, you’re better equipped to avoid the risky stocks and land on the hidden gems. In your research, look for companies that:

  • Have clientele in multiple regions or throughout a country.
  • Have popular new services and products in the pipeline or a product that has gained FDA approval.
  • Are generally profitable.
  • Have little to no debt.
  • Have a long-term business plan.
  • Have recently entered into exciting business partnerships, mergers, or acquisitions.
  • Have strong management or have hired an experienced team or leader.

The above qualities are only a few items to consider, and they often result in a spike in trading volume. You can find information about companies from economic news, analytics, and financial reports online or through the stock exchange. Take the time to read these technical analyses and charts when selecting a penny stock.

Beware of Pump and Dump

Traders have historically used the pump-and-dump strategy to make a quick buck. They boost interest in certain penny stocks, then sell them for a profit. They buy a stock cheap and try to get others to jump on the bandwagon — often dishonestly or by using unscrupulous means. They then sell it high. 

You’ll encounter difficulties with this challenging and potentially unethical strategy. If a company is indeed the next hot stock, it’s hot probably because the company is under new management, has merged with another company, or has an exciting product launch coming up.

Look for High-Volume Stocks

High-volume stocks are typically good stocks to invest in. They have a great deal of trading activity, which indicates that many people want the stock in their portfolio. High-volume penny stocks are less risky than low-volume stocks that could be difficult to unload. This condition is what is known as liquidity risk. Since they don’t have much trading activity, low-volume stocks aren’t likely to see much change either.

Look for stocks trading upward of 100,000 shares a day. Don’t be surprised to see a great deal of volatility with high-volume stocks due to all the trading activity. This activity is normal, and it’s how you can seize upon a profitable high when trading. As soon as you see a gain, sell to minimize your risks.

 

Don’t rely on luck to make money in penny stocks, and don’t get greedy. Put emotion aside and have the self-control to sell as soon as a penny stock turns a profit. Following time-tested trading strategies such as those above will help.