One of my favorite topics to blog about is penny stocks. Penny stocks are shares that are listed on a stock exchange for less than $5. To put them into perspective, that is less than $1 per share, so these are companies where the market capitalization is less than $100 million.
So, why are they so intriguing to me? Well, from a fundamental point of view, people with a limited investment capital are going to be attracted to these stocks since they carry a great deal of potential for growth. The only catch is getting involved in them can be tricky. It can be like picking pockets!
However, from an analytical point of view, if you know what to look for you can make huge gains. For instance, a recent pick I received was for a penny stock that had just started trading. So it was only trading at $0.15. I purchased 2000 shares for $150. That should have been the entry.
But what happened was the stock went up so much that I got stopped out! Why? Well, the company was doing well. It had a very high daily trading volume. It was making its profit from the high volume trade, so I was stopped out.
This is the problem with penny stocks. You can make huge gains but you will be stopped out at the first sign of promise. That's what happens in the stock market. There is just so much going on at any given time! So, I just had to bite the bullet and buy back the stock when it stalled.
It was right about $0.30 so I sold it out and bought it again for $0.45.
So, now I know what I should have done. I would have sold the stock for over $0.90 when it was above $0.50 (the highest it ever went). I could have taken all 5% profit with very little risk.
In this case, I missed out on a 200% profit. However, in any stock situation you want to take this time. Just make sure you check for the following factors.
1. Check the volume. Does the stock have enough volume for you to get a decent profit? If not, sit with it for now.
2. Check the P-E ratio (price to earnings ratio). A stock has to go through this to be worth buying. I don't like to buy stocks that have a P-E ratio that is under 60.
3. Check your emotions. How do you feel about the stock? It has to be at least partially driven by something other than what the stock price will be in the future. If it is not, sit and forget.
In conclusion, I think this is a good way to make some money but you have to use this strategy wisely.