There is an important factor to remember when building a penny stock watch list. Most stocks that trade below $1 per share are from companies that are not doing very well financially, making them risky ventures in the stock market. They might be new businesses that haven’t been able to prove their worth. They might be companies that have been around for a while and have proceeded to lose a great deal of money. Some new companies are viewed favorably even when they don’t turn a profit right away, but experts consider others to be questionable. What this means for people interested in penny stocks is understanding that these securities are nearly always not buy-and-hold prospects for the long term. However, they can be bought and sold for a profit on mechanical factors, or in other words, chart patterns and indicators. They can be bought and sold for a profit when people react in certain ways to news about the company or the sector.
Profit margins on these stocks tend to be small. People often are attracted by the hype around penny stocks, getting the idea it’s pretty easy to buy shares at 75 cents and sell them for $2 a week or a month later. Some unscrupulous websites that promote penny stocks show a plethora of charts in which this type of price move happened, but people must consider all the other times it didn’t happen. Trading penny stocks is a little more like day trading in regard to profit margin. The best penny stock traders tend to look for a price move of 25 to 50 cents in their favor and then sell.
Obviously, these types of precision trades aren’t appealing to everyone. A person with a methodical mindset who isn’t interested in making exciting, dramatic trades might do well with trading cheap stocks. The venture can make a consistent profit for people who are cautious, who study and practice, and who quickly learn from their mistakes. Keeping each position at a conservative percentage of the portfolio is critical. For example, only devoting 10 percent of the portfolio’s money to one particular stock is a better strategy than buying three stock positions, each at one-third of the portfolio.