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What Are Penny Stocks? How To Choose One?

Penny stocks are shares of small companies that trade at low prices. These stocks are an investment alternative that offers investors an excellent opportunity to enter the forex market. Their low cost and high visibility make them an attractive alternative to investing in large-growth stocks or bonds. But the penny stock market is not all rosy - like with any other investment, there are certain risks to be aware of. This is where the question comes, how to choose the right penny stock? In this blog, we explain what these stocks exactly are, how to pick the right one and the benefits of buying these stocks.

What Are Penny Stocks? 

Penny Stocks

Also popular as micro-caps, Penny stocks refer to low-value shares of companies generally traded at Rs.10 or below. The trade of these stocks usually happens on the over-the-counter (OTC) market, a network of dealers that communicate with each other electronically or by phone instead of using a central exchange.

Many people view penny stocks as a high-risk investment, and with good reason. Many of these companies are new and haven't been around long enough to establish themselves, making them more volatile. Furthermore, since they're not well known, there's often little information about them. This lack of transparency can make it difficult to determine whether or not a company is worth investing in.

There are a few reasons someone might still want to invest in penny stocks. For starters, they tend to be much cheaper than larger companies' shares, which means that investors can buy more significant shares for the same amount of money, leading to higher returns if the stock price goes up. Additionally, penny stocks tend to be more volatile than blue-chip stocks so that they can offer more significant profit potential in a shorter period. Finally, some investors view penny stocks as a way to get in on the ground floor of an up-and-coming company before it becomes the mainstream and its stock price rises.

Although penny stocks tend to be a hazardous investment, there also can be significant rewards if you find the right store. There have been numerous cases where investors have made a fortune by investing in penny stocks.  

How To Choose A Penny Stock?

How to Choose a Penny Stock

When looking for a penny stock, you'll want to look at the company's financial statements. If the company is profitable and has a good balance sheet, it may be worth investing in.

You also want to look at the stock's volume of trading activity. This tells you how much interest there is in the market for that particular stock. If there's low trading activity, it could be a sign that investors aren't interested in buying or selling company shares. Likewise, many more ways to ensure you only choose winning stocks.

Do Your Research

To start doing your research, look at the company's financial statements to see how well they're doing financially. You can also look at recent press releases or other publicly available information about the company—you may find that they have recently announced something new they are working on or some exciting news coming out soon.

If possible, visit their website and check out their social media accounts (if they have them). If possible, read through any recent blog posts or articles written by management that were posted on those platforms as well!

Identify The Bottom And Top

Before buying any penny stock, you must understand how volatile the market is. Penny stocks are highly speculative and can move quickly, so it's a good idea to use a charting tool like StockCharts.com or TradingView.com to monitor price action when choosing a penny stock.

You first need to identify your target company's bottom and top of the trading range. This will help ensure that when buying shares of the company, you aren't paying too much (or too little) for them based on their previous performance in the market.

Once these levels have been identified, place stop orders below this level so that if prices fall below this point again before rising again later down the road, they won't sell out without making any losses!

Avoid Penny Stocks With A Low Volume

While it might seem reasonable that a stock is trading at a low price and high volume, this isn't always the case, low volume means fewer buyers than sellers in any given stock. This can be dangerous because it means you may not be able to exit your position easily and quickly if you need or want to sell -- even if your stock has risen 50% in value overnight! If this happens, you're stuck holding onto shares worth less than what you paid for them because there aren't enough buyers willing to pay more than $0.01 per share (or maybe even less).

Some More Tips

  • Don't buy more than you can afford!

  • Don't gamble with your future while investing in penny stocks!

  • Invest in companies that are growing and innovating their businesses every year

  • Diversify your portfolio by investing in different sectors of the economy, such as retailers and technology companies.

  • 'Don't expect to make money right away - it takes time for a company to grow into something bigger and more profitable.'

Advantages Of Buying A Penny Stock

Many people view penny stocks as a high-risk investment, but there are several benefits to investing in these types of stocks. Here are a few uses.

Affordable Stocks

Penny stocks tend to be much less expensive than shares of more well-known companies. So, you can buy more significant shares for the same amount of money, which can lead to greater profits if the stock price increases.  

Their Lack Of Attention, Your Benefit

These stocks are often not well known or followed by analysts. This lack of attention can work in your favor because it provides an element of surprise when the stock price unexpectedly jumps. This can lead to what is known as a "pump and dump" scenario, where early investors sell their shares at a higher price after convincing others to buy into the company.

Less Regulatory Requirements

Penny stocks tend to be smaller companies that have minor regulatory requirements. This means you can sell them without going through the usual channels, leading to higher profits when selling your shares.

Easy Access To Stock Market

Penny stock investing is an easy way to enter the stock market without paying exorbitant fees or dealing with excessive paperwork. A penny stock investor can buy stock in a company with little value but worth millions of dollars if the company's value increases significantly over time.

Get A High Degree Of Liquidity.

It is the ability to buy or sell an asset quickly and at low costs. For example, you buy 1,000 shares of a penny stock for 5 per share, and the total investment cost would be just 10,000. If the stock price increases to Rs. 10 per share, you could sell your shares and double your money in a few days. And if the stock price falls to Rs. 3 per share, you could still sell your shares and recoup most of your initial investment.

Things To Look Out For Before Investing In a Penny Stock

  • Write down your investing risk tolerance

  • Find out the kind of stocks you like to invest in

  • Check what the fundamentals of the company are like

  • Look at the past performance to see how it drives their stock value


All of these elements take the gamble out of investing and make it more like a calm way to make a profit. Focus on markets that are under-researched and have good potential for price appreciation. The next time you're looking for a high-risk investment, keep in mind what the penny stock market offers.

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