Last Updated on Dec 19, 2019 by James W

Investing is a big financial decision, and there are many investment opportunities. One opportunity is investing in penny stocks. Understanding what penny stocks are as well as the risks and benefits is essential. These tips will help you with your penny stock decisions.

What are Penny Stocks?

Penny stocks, sometimes called low-grade securities, are stocks that sell for less than $5 per share. These investments are generally higher risk than investments in traditional stocks. Penny stocks are usually investments in small companies with a greater risk of loss, often because of poor capitalization. These stocks, however, may have higher returns if the business succeeds.

Image via Flickr by Edgar Zuniga Jr.           

Penny Stocks and Financial Risk

Before you invest in penny stocks, it’s a good idea to check if you can absorb any losses if your investments fail to bring returns. Ask yourself if investing in penny stocks will negatively affect you financially in paying for the basics in your life such as food, shelter, healthcare, housing, and retirement plans. If your budget cannot withstand the stress of financial loss, volatile penny stocks are not good investments for your portfolio.

Research Penny Stocks

Understanding the general risks of penny stocks is essential, but being empowered with specific information is invaluable. However, be careful about your information sources. Avoid social media, chat boards, and other non-professional forums. Stick to mainstream financial news sources. Fundamental stock screeners, for example, are useful tools for penny stock investors. A fundamental stock screener is an online subscription service or software program with variables you choose for capitalization, company size, or company business.

How to Use Fundamental Stock Screeners

Look for screeners with flexible customization that are inexpensive, associated with reputable financial news outlets, and have variables you can tailor to your investing needs. Screener variables are numerous depending on the service, but some to research are whether you prefer companies with stock prices with all-time highs or those with stock prices that have fallen. Stocks in a specific industry or price-to-earning ratios are variables to consider when using fundamental stock screeners.

Penny Stock Picking Basics

Regardless of where you choose to invest or what screeners you use, you should use investing basics. Choosing penny stocks without investigating the company’s soundness can lead to financial losses. Some things to know before investing are:

Don’t trust scam companies that use email or social media to lure you into buying penny stocks. Stick to mainstream financial news and stock tools for information.

Capitalization is the amount a company needs to start, grow, and sustain a business. Penny stock businesses without capitalization for sustained growth are poor investments.

A business should have actual products or services to sell, not just an idea. Beware of investing in businesses that promise goods or services at a future date.

Taking these steps of being cautious about the money that you have to invest, researching skeptically with trusted financial news sources, and using online screener tools to customize your portfolio can help you carefully invest in the penny stock market.

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