Important points to be considered while trading penny stocks

Published By Ayesha Jaiswal, 12 Oct 2017

Important points to be considered while trading penny stocks

Penny stocks are a type of stocks generally traded at lower prices. They have less market capitalisation, they are most illiquid, and are usually listed on a smaller exchange. These stocks are very unfounded in nature and are known as highly risky because of lack of liquidity, a smaller number of traders. It needs lots of market knowledge and market expertise to gain a good return by trading penny stocks. Many traders take suggestions from financial market experts with their best stock tips, commodity trading tips or much more in order to save investment from huge losses.

How To Buy Penny Stocks

Here are five useful steps to follow before purchasing a penny stock. Here I am providing some important points that evaluate stocks is potential. A trader is investing his money because he would like to get a return on it, right? For this, he should ask himself whether the penny stock he is considering has potential to get a better return or not? An investor should complete a realistic risk-reward analysis for the stock, even if he is only investing a small amount in it.

1. Limit your holdings - Maybe a trader is excited about his favourite penny stock investment, but still, he needs to protect himself from risk. Secure your losses by limiting your position holdings in a stock, it should not more than 2%. Diversification of stocks is a good option, it also makes sense to diversify your penny stock portfolio but it shouldn't exceed 5% to 10% of your portfolio, depending on your risk bearing capabilities.

2. Check liquidity of stock- No matter a trader is doing a successful investment in a penny stock, still, at one point he will need to sell his position. A trader should have enough liquidity and trading volumes so that he can trade in an effective way. Otherwise, you may quit in a situation where there is few purchaser of stock and large bid-ask, in this cases it seems impossible to convert desire profit into reality.

3. Evaluate when to sell a stock – Penny stocks is usually not suitable for the long-term position. It seems very rare that a trader holds a penny stock as a long-term buy-and-hold investment. This sector of trading is built specially for short-term trades, so it is much important to know when to sell and it is when to buy.

4. Always Look for high profitable stocks- A trader should look for better-performing companies, Buy stock in such company that is performing good in the market. Companies set up by experienced managers who have successfully done their job in a previous company. Always look for such companies who are well managed, such stocks are more profitable and capable to provide a good return from the market.

Basically, Penny stocks are considered highly risky, but we can not ignore that some of them have the potential of turning a small investment into a big profit for the traders. Depends on the trader how well he can manage his risk and rewards in the market. Suitable for high-risk tolerance investors. Financial market experts provide profitable strategies and trading tips like forex tips, binary option trading tips and stocks tips that are useful for earning a better profit.