Our Top Broker Choice for Trading Penny Stocks
| Name | Score | Visit | Disclaimer | |||||
|---|---|---|---|---|---|---|---|---|
Freetrade Read Review | 7.6 | Visitfreetrade.io | The value of your investments can go down as well as up and you may get back less than you invest. |
What Are Penny Stocks?
Penny stocks are stocks that trade for less than $5 per share in the US and £1 per share in the UK. They tend to involve minor, less established companies that don’t have the backing of more prominent investors like blue-chip stocks do. Penny stock prices are highly volatile, making them difficult to predict due to the low liquidity.
Penny Stocks vs Blue-Chip Stocks
Blue-chip stocks refer to stocks of larger, more well-established companies with a long history in the stock market. These stocks tend to be less volatile, have higher liquidity, and represent large corporations like Apple or Amazon. They are also usually part of an index or ETF (Exchange Traded Fund) and are considered safe investments. On the other hand, penny stocks are much more volatile and represent smaller companies that don’t have the backing of larger investors. As a result, they are riskier investments and have less liquidity, but they can potentially offer a higher return on investment. Besides being highly unpredictable, penny stock doesnt have the same protections as blue-chip stocks, such as being part of an index or ETF.
What is an OTC Market?
While you can find penny stocks in major exchanges like the LSE, they are found more often on over-the-counter (OTC) markets.
The OTC, or “Pink Sheets”, is a less regulated market that allows investors to beginners buy penny stocks at lower costs. Companies listed on these sorts of exchanges do not have to meet as many criteria as those listed on a major exchange. However, they still need to abide by specific disclosure laws. OTC stocks can be traded on a brokerage account or through an online trading platform like Freetrade.
How to research penny stocks?
High-risk, high-reward securities like UK penny stocks require care and caution when researching. Many low-cost securities you will see belong to companies that are headed to bankruptcy or in substantial debt. To refine your search, you can benefit from different schools in market analysis. Day trading penny stocks may generate short-term gains, but it is difficult to achieve long-term profitability due to the high volatility and inherent risks associated with these low-priced securities.
Technical Analysis
Technical analysis involves looking for patterns in price movements that may indicate buy or sell signals for specific stocks. It takes its roots from the renowned stock trader Charles Dow, who developed the Dow theory to analyse stock market trends. Technical analysis has evolved over time to include approaches like support and resistance, price waves and patterns, and indicators. The underpinning principle, however, is the use of past price action to predict the future price movement of a stock.
Fundamental Analysis
Generally speaking, fundamental analysis involves looking at the underlying factors that could lead to stock price changes. This includes company financials, news and events related to the company or industry, macroeconomic trends, and other information which can be used to make an investment decision. It is a more qualitative approach than technical analysis and requires more research and knowledge of the stock market.
Risks and Benefits Involved
- High Potential Returns – Penny stocks can offer a higher rate of return on investment compared to blue-chip stocks due to their low price and high volatility. This can result in huge gains for investors who get in at the right time.
- Low Investment Requirements – Penny stocks can be bought in large quantities with a small initial investment, making them accessible to all types of investors.
- Diversification – Investing in the best penny stock provides an opportunity to diversify a stock portfolio and spread out risk across different markets and sectors.
- High Risk – Penny stocks are very risky investments due to their low liquidity and high volatility. Prices can move up or down drastically within a short period, making it difficult to predict price movements accurately.
- Lack of Transparency – Some companies that trade stocks on OTC exchanges do not have to adhere to the same disclosure laws as those trading on major exchanges. This means there is often less information available about the company and its financials, making it more challenging to make informed investment decisions.
- No Guarantee of Success – With penny stock, no matter how much research is done, there is no guarantee that a trade will be successful.
How to Invest in Penny Stocks: A Step-By-Step Guide
I. Learn the basics
Before investing in any stock, it's crucial to have a basic understanding of what penny stock trading involves, including how to read financial statements and analyse company fundamentals. This also involves taking the time to learn different penny stock trading strategies and investment concepts.
II. Research and select stocks
Once you have a basic understanding of the best penny stock trading, it’s time to start researching potential investments. Look for stocks that show promise based on their fundamentals, financials, news, and other available data.
III. Open a trading account
Before buying or selling any penny stock, you will need to open a brokerage account with an investment platform that specialises in penny stock. This is where your funds will be stored and managed. Again, make sure to research and compare different brokers to find one that fits your budget and needs.
IV. Decide how much you'd like to invest
It’s essential to know how much money you are willing to risk when trading penny stocks. Start small and increase your investments as you gain experience and confidence in the market.
V. Execute and monitor your trades
Once you’ve opened a trading account and identified the right stock, it’s time to execute your trades. Monitor your portfolio and adjust accordingly as the markets fluctuate. Keep an eye on news regarding the companies you’re invested in so that you can make informed decisions when necessary.
Are Penny Stocks Safe?
In summary, investing in the best penny stock can significantly diversify a stock portfolio while potentially earning higher returns than blue-chip stocks. To stay safe, it's best for investors to research stocks adequately and trade with penny stock trading brokers allowing OTC trades.
