Trading Stocks Under 1$

So called penny stocks are cheap stocks that are traded under one dollar. People buy them in a hope that a stock that cost 0.05$ will pass to 0.20$ or with extreme luck to 5$, leaving the owner with a nice profit.

As an investor you should now that expected return from stocks under 1$ is usually much lower than an expected return from the market in a whole. This expected return is composed of the stocks with an extremely low return (often losses) and one or two stocks once in a while with extremely high profits.

So, while trading stocks under 1 dollar look at the main points:

Why did the company go public? Usually companies fund themselves through private investments until they get big enough to go public. So, either the company has a project that it needed to fund that should bring in a lot of profits in case of success or the owners of the company don’t believe in their own company and want to make money through an IPO before the company died. Of course you only buy in the first case. Do your research and find out everything about the project and its chances to succeed. Remember, you risk your money and the risks are high. As an example, I can give a pharmaceutical company that tests a new medicine.

Daily trading volume for the stock is also very important. If the stock is not traded actively the bid of a couple of thousands of dollars (it might be your bid) can raise the price and sell of the same amount can bring the price down. So, imagine if you are buying and pushing the price higher, right after someone who bought lower sells off and pushes the price back leaving you with losses. Something that happens all the time but if the stock is actively traded you will probably not even see it.

Always look at the bid/ask spread. Usually it is inversely correlated to the volume. Lesser is the volume bigger is the spread. One of the dangers trading stocks under 1$ is that even if the stock’s price goes up you still lose because you can’t cover the spread. Always calculated how much profit in percentage you should make before you will break even and don’t buy if it doesn’t make any sense.

Always do your fundamental analysis before doing your technical analysis. Penny stocks attract a lot of buyers who do not have a clue. So, conventional charting techniques will not work. However, if the fundamentals of the company are good there is a chance that it will be bought by a bigger company or some big mutual funds will want to have it in its portfolio. This always means growth.

Brief, stocks under 1$ are very risky investments and sometimes are compared to gambling. If you are really sure you want to invest those make sure you calculate your risks and approach it with all the caution.

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