Penny stocks carry a high risk of loss and a high potential for profit, therefore investing in them should be done with prudence.
While there are significant dangers connected with buying tiny stocks, investors can profit, which is why penny stocks are still traded every day.
What are Penny Stocks and How Do They Work?
Penny stocks are ultra-low-cost equities in Nigeria that can be bought and sold for as little as 50 kobo to 1 naira per share. This means they’re frequently bought and sold in large quantities. Even though these stocks appear to be inexpensive, they come with a significant level of risk and volatility.
The draw of penny stocks is simple: they are inexpensive and offer high returns. Because some penny stocks have minimal trading volume, it might be difficult to buy and sell shares of these stocks. Other penny stocks are extremely volatile, with large price fluctuations up and down.
Penny stocks fraud.
The most popular method of manipulating penny stocks is through “pump and dump” methods. To generate excitement and entice uninformed investors to buy, the company would pay penny stock promoters to send out hundreds of thousands of emails and post fake news and false information about the company on social media message boards. When the stock price rises as a result of buying, firm owners, insiders, and promoters begin to sell their stock. They will short shares of the stock to drive the price lower once they have sold all of their shares for a profit.
How to Trade Penny Stocks: Some Tips
Due to their lack of liquidity, penny stocks are considered highly speculative (and high-risk) investments. These three penny stock trading ideas will act as a guide for you.
1. Diversify and limit your holdings.
Don’t get too thrilled about your favorite penny stock’s possibilities; you still need to protect yourself. Minimise your stock holdings to no more than 1 percent or 2 percent of your whole portfolio to limit your losses. It’s also a good idea to diversify your penny stock portfolio, which should make up no more than 5% to 10% of your total portfolio, depending on your risk tolerance.
2. Examine trading volumes and liquidity.
Even if you’ve made a profitable penny stock investment, you’ll need to be able to sell your stock. In order to trade efficiently, the stock should have sufficient liquidity and trading volumes. Otherwise, you may find yourself in a situation with few buyers and enormous bid-ask spreads, making it nearly impossible to turn your theoretical profit into a real one.
3. Recognize when it’s time to sell your penny stocks.
A penny stock is almost never a long-term buy-and-hold investment. Because the industry is based on short-term trading, knowing when to sell is just as vital as knowing when to buy. Consider booking profits immediately rather than waiting for larger earnings that may never materialize if you make significant gains in a penny stock over a short period of time.
For investors who can’t buy shares of Google or Apple, penny-stock trading flourishes, but you must be careful of pump-and-dump schemes and stock promoters that work as shills to influence the penny stock price. To live in these shark-infested waters, you must be extremely cautious while trading penny stocks and employ the greatest penny stock method available.