Any stock that sells at a low price point (usually less than $1) is called a “penny stock,” but as you can see the term is somewhat of a misnomer because many of them sell for over that price. The low price may seem attractive to some people, and there is the possibility that they can grow up to ten times the amount for which you originally paid.
This idea of getting that kind of return for such a bargain price can cause beginning investors to dive in without giving it a second thought, but you have to understand their dynamics before you take the plunge. You can get a tremendous return from penny stocks, but they’re not without their risks.
Investing in penny stocks is like finding a “diamond in the rough.” You could find a big winner, but you’ll have to dig through a pile of dirt to find it. For that reason, these types of stocks are not for someone with a low risk tolerance. In fact, anyone who can’t afford to take on a great deal of risk should avoid them like the plague.
If you do decide to try your hand at penny stocks, there are some things you have to look at before you spend any money.
Price vs. Value
Many investors think that penny stocks are more affordable because the low per-share price makes them think that they’re getting more for their money, but that may not be the case. In fact, you could by thousands of shares that aren’t worth the paper they’re printed on. So, make sure you take a careful look at the stock’s fundamentals before you decide to invest, because the per-share price isn’t the only factor you have to consider.
Watch Out for Dilution
Dilution can be the result of a number of different factors, and it can affect the stock’s value over a period of time. Some of them can include, but may not be limited to:
- Employee stock options
- Issuing more shares to raise capital
- Spitting stocks
All of these factors can cause in increase in the number of outstanding shares, which can dilute the value of the stock. And that can spell trouble for any investor. You want to find a company that has a solid grasp of its share structure, which is why you need to look at the fundamentals in addition to the per-share price.
Don’t Overlook the Fundamentals
This concept is starting to sound like a broken record, but it’s a point that’s worth emphasizing. Some investors swear by technical analysis, and you don’t want to ignore the charts. But they don’t always tell the whole story. That’s why you need to analyze the company’s fundamentals in addition to the data to get a more complete picture of the stock’s investment potential.
While doing this type of analysis, you want to look at both the company and the industry in which it operates. Look for any new developments, and analyze the company’s business practices. It also helps to look at the overall economy, and take a look at how well it performs during a financial crisis.
Most importantly, take the time to understand the dynamics of their industry so you can get a better idea of how the company stacks up to the competition. But what may work in one industry may not work in another. So, you want to take that into consideration as well.
Finding a Penny Stock Broker
The key to finding hot penny stocks is to have access to the right information, which is why you need to find a quality penny stock broker. There are many companies out there who offer penny stocks to investors, but not all of them are legitimate. Many of them will use high-pressure sales tactics to persuade you to buy stocks that they know are worthless, and the lack of regulation can make it hard to get the right information so you can make an informed decision.
AAA Penny Stocks is a step above the completion, because we offer quality stocks combined with accurate and up-to-date information. Unlike many of our competitors, we work hard to serve our customers, and we want them to trade successfully.
If you want to find out how we can help you find hot penny stocks, get in touch with us today!