Factors to Consider When Trading Penny Stocks
Trading penny stocks is a great way to spend little and profit a lot. You just need to know the factors and signs when it comes to investing, as you can quickly lose all your money without the proper knowledge. Many new individuals will jump into penny stocks because of the hype and the incredibly low prices. However, everyone (even experts) need to be wary when diving in. Specifically, knowing which factors you should consider before trading penny stocks is very important and will save you money in the long run. So, to lend you a helping mental hand, this article will be exploring the important considerations you should make before getting involved in the penny stock environment.
Stock Float
The stock float of a stock is literally the number of shares that are available for trading. This is an important factor to consider when trading a penny stock as this will tell you a number of valuable factors. If there is a low float penny stock, this will mean that it is prone to an upward explosion in share price is the shares are gobbled up quickly. Many traders and investors look for these types of stocks as the potential for profit is enormous. However, you need to have a strategy and an exit plan before trading these stocks because although profits can be made quickly they can be lost even quicker.
Management
Management is another key factor for consideration when trading penny stocks. This is because the management of the shares will be a key indicator as to whether you should invest your cash. The ultimate success of a company is going to be the management and it is important to vet the CEOs and directors of the company because trading. Remember to check out their history when it comes to running companies and identify any successes or failures they have experienced in the past. This will tell you whether or not the company will be successful, providing you with profit.
Catalysts/Events
This is something that many experienced penny stock traders rely on. Penny stocks may rise and fall very quickly depending on particular events happening in real life. These events will often be displayed in the news and this is why it is important to make sure you’re with a broker that provides streams of media from multiple channels. An event in the news can both act like a catalyst and explode the share price or it can turn it to zero. In addition, growing companies attract more new coverage from third-party sources and this is something you should have in the back of your mind.
Volume/Liquidity
Penny stocks are prone to have low-liquidity and fluctuate rapidly as more individuals dump their funds into the stock. Although trading a penny stock that has a low liquidity has its benefits it can also lead to enormous losses. Considering the trade volume of a penny stock is important before you start to trade as it will tell you how frequently the stock is being bought and sold and will also inform you of the risk you’re putting yourself into.
Conclusion
Penny stocks are very tempting and gambling with them can result in enormous profits. However, you need to consider the above factors before you go ahead and invest your cash. They are heavy affected by news and press release and tend to have a low-liquidity because of the frequency at which they’re traded. Always have these things in the back of your mind when trading and, hopefully, you will find more success than failure.