5 Penny Stock Tips That Can Save You A Fortune

If you’ve had some exposure to the stock market, the thought of getting into penny stocks has likely crossed your mind at least once. After all, why drop hundreds or even thousands on a single share when you could spread that money around and snap up shares for less than the price of a coffee? Right?

That said, while grabbing stocks for less than $5 — or sometimes, even a few cents — might seem like a steal, the penny stock investment arena is not just about low prices. Penny stocks are notorious for being a wild ride, with prices that can skyrocket or plummet faster than you can say “sell!” So before you jump in, let’s unpack some essential tips about penny stocks.

1. Understand the Landscape

Penny stocks are like those tiny, hole-in-the-wall restaurants; they could be the next big thing or a health hazard. They trade over-the-counter (OTC), meaning less regulation, more volatility, and higher risk. These stocks often belong to startups or very small companies and are illiquid, so you might get stuck with them longer than you’d like.

2. Check the Trading Volumes

Always eye the trading volumes. It's not just about how many shares are trading but how consistently they’re traded. You want to see steady activity, not just a one-off spike. Low volumes mean fewer buyers when you want to sell, which could force you to sell at lower prices, turning your investment into dead money.

3. Evaluate the Company's Profit Potential

A company burning cash faster than a bonfire isn't usually a winner. Dig into why the company isn't profitable yet. Is it temporary, or are they bleeding money with no tourniquet in sight? If they want to dilute shares for financing, your ownership could shrink faster than cotton in hot water.

4. Have a Solid Entry and Exit Strategy

Penny stocks are not the buy-and-hold types. Set clear goals for when to sell, whether for a gain or to cut losses. For instance, if you buy at $0.10, decide if you'll sell at $0.12. Stick to this plan rigidly, because, in the penny stock world, prices can plummet just as quickly as they soar.

5. Do Your Homework on the Stock's Origin

How did you hear about the stock? If it's through a newsletter, check its track record. Many are used for pump-and-dump schemes where insiders sell off once the stock is hyped. Not all newsletters are scammy, but it's your job to separate the wheat from the chaff.