Knowing what penny stocks are and how to identify good opportunities can lead to substantial profit over time.
We have created a guide on exactly this, giving you the chance to invest in penny stock that may lead to substantial gain over time.
What are penny stocks?
Common stock that trade for less than £1 in the UK or less than $5 in the US stock exchanges are considered penny stocks (sometimes referred to as penny shares).
This low price means that there is a higher chance that the stock is a speculative investment.
Despite this definition, there have been instances where penny stock has expanded to cover stock that was valued over £1 or $5.
In Australia, the companies that deal with penny stock are often called small-cap stock and they generally have a market cap of $50 million AUD.
Normally penny stocks cover extremely low stock prices and are considered to be very high risk due to their high volatility. However, they also have a significant possibility for substantial growth over time.
Penny stocks are popular due to their ease and potential. For instance, if you invest $1,000 in a very small company, you could receive a significantly larger share than if you purchased a blue-chip share that may cost the same (or most likely more) for a smaller percentage of ownership.
On top of this, if your share does one day join the blue-chips, then your returns will only increase.
How to trade penny stocks in Australia
- Register for a CFD trading account. By creating an account with a CFD trader, you will be able to trade the price movements of penny stocks.
- Find what penny stocks are right for you by doing your research. As with any financial transaction or investment, it is incredibly important that you conduct thorough research before trading stock.
- Choose between buying or selling. You will have to come up with a trading strategy that determines the way you interact with your entries. If you think the instrumental price will likely rise in the future, buy. If you think the price is set to fall, then it might be best to sell.
- Follow risk-management guidelines. As well as researching, it is important that you understand and follow the necessary risk-management strategies when you decide to play any trade.
- Choose your size and place the trade. Before you confirm any trade you decide on, you should apply any of the risk-management strategies you have in place, such as take-profit or stop-loss.
- Monitor and close when necessary. Lastly, you need to monitor your trades to check if you’re making a profit. It is important to stick to your trading plan and to close your trade when you have reached your target price.
Penny stocks can be extremely unpredictable, with price fluctuations of approximately 20 per cent being common.
This is why it is important for you to follow risk-management guidelines to ensure you experience the best practice in industries that have expected large market growth.
Once you have done the necessary market analysis and you have chosen your trade, it is important that you don’t forget to sell.
It is common for people to sit on a trade that has given them profit, but this can lead to you losing your hard-won profit.
You should generate a strategic plan to determine the potential success for each trade and understand when you should sell.
The Best Penny Stocks to Trade
Penny stocks are usually small or start-up businesses that are chasing opportunities to grow and build their company. One great way they achieve this is through penny stocks.
Some of the well-known and popular brands that have once used penny trading include Ford, Monster Beverage and SiriusXM.