By the time you're done reading this article, you'll discover the components of a penny stock and how to start investing in penny stocks. We've also researched five of the best penny stocks for you to consider adding to your portfolio.
What Are Penny Stocks?
Penny stocks are low-priced securities that aren't actually stocks for a penny — they can trade for less than $5 per share. Though penny stocks are generally associated with companies in their early stages of development, there are also some well-established companies that trade in this price range.
Penny stocks are generally much more volatile than stocks of larger companies and the shares are often less liquid. That means that it can be more difficult to buy and sell penny stocks and that prices can fluctuate more dramatically.
Penny stocks are also more likely to be the target of pump-and-dump schemes, where unscrupulous investors try to artificially inflate the price of a stock in order to sell it at a profit. If you're considering investing in penny stocks, it's important to do your research and be aware of the risks. Through careful research and a disciplined approach, penny stocks can be a viable part of a diversified portfolio.
How to Invest in Penny Stocks for Beginners
There are a number of reasons why it's important to understand how to invest in penny stocks. For one, penny stocks can be a viable way to get started in the stock market without having to invest a lot of money. Penny stocks also tend to be much more volatile than larger stocks, so understanding how to trade them can be very beneficial. Finally, penny stocks can offer the potential for huge profits, so it's important to know how to buy and sell them in order to maximize your chances of success.
It's also important to know these steps to help prevent potentially huge losses. Do your own research and know when to sell and take profits.
Step 1: Do your research.
To make money from penny stocks, you need to do your research. There are a number of online resources, but one of the best ways to find good penny stocks is to use the MarketBeat stock screener.
A stock screener allows you to search for stocks that meet certain criteria. For example, you can search for stocks trading below $5, have a market capitalization of under $500 million, and have a beta of less than two.
Once you've found a list of penny stocks that meet your criteria, it's time to do your due diligence. This means reading the company's financial statements, looking for news stories about the company and speaking to people who are experts in the field.
Step 2: Start small.
One of the best things about penny stocks is that you can start investing in them with a small amount of money. In fact, you can start with as little as $500 and still see a good return on your investment. This is a great way to get your feet wet in the investment world without risking a lot of money.
Another reason to start small when investing in penny stocks is that it allows you to diversify your portfolio. By investing in a variety of penny stocks, you can spread out your risk and increase your chances of seeing a profit. This is a great way to minimize your losses and maximize your gains.
Step 3: Have a plan.
Once you have done your research and have found a few penny stocks that you are interested in, create a plan for how to get into penny stocks. This plan should include how much money you are willing to invest, your goals and your exit strategy. It is also important to have an understanding of the risks involved with cheap penny stocks before you invest any money.
Step 4: Be patient.
When it comes to penny stocks, be patient in order to see any sort of return on your investment. These stocks are notoriously volatile, so it is important to be prepared for a roller coaster ride. The key to being patient with penny stocks is to have a clear investment plan and stick to it. This means knowing how much you are willing to invest, what you are hoping to gain from the investment and setting a timeframe for yourself.
Penny stocks can be particularly hard to hold onto during a bear market, as investors generally dump their speculative investments (such as penny stocks) first during an economic downturn. This causes the value of these investments to plummet. The average bear market lasts for around a year before recovering, so be prepared to hold onto your penny stocks for a while if you don't want to take significant losses.
Step 5: Monitor your penny stocks.
There are a few different ways to monitor stock prices. One popular method is to use a stock ticker. A stock ticker is a tool that displays real-time information about the prices of stocks. You can find stock tickers on many financial websites, including MarketBeat.
Another way to monitor stock prices is to set up price alerts. Price alerts are notifications that you can set up to receive whenever a stock reaches a certain price. Once you have a system in place for monitoring stock prices, you'll need to pay attention to the trends. Are prices going up or down? Is the stock volatile or stable? By paying attention to these trends, you can make informed decisions about when to buy or sell your penny stocks.
Step 6: Be prepared to lose money.
Penny stocks are a risky investment, so you need to be prepared to lose money. Don't invest more than you can afford to lose and don't be afraid to pull out if the stock starts to decline.
5 Best Penny Stocks
Here are the five best penny stocks to consider adding to your portfolio. For more ideas, take a look at our most popular penny stocks and best stocks under $5.
1. Sandstorm Gold Ltd. (NYSE: SAND)
Sandstorm Gold Ltd (NYSE: SAND) is a Canadian gold streaming and royalty company with operations in Canada, the United States, Mexico, Brazil, Chile, Peru, Australia and Burkina Faso.
The company has over 250 royalties it has acquired since 2009 which are claimed to generate stable cash flow and have significant potential.
2. The Lion Electric Company (NYSE: LEV)
The Lion Electric Company (NYSE: LEV) is a North American manufacturer of zero-emission electric vehicles and electric drivetrains. The company offers a range of commercial vehicles, including school buses, medium- and heavy-duty trucks and urban transit buses.
The Lion Electric Co. went public in February 2021. The company raised $1.1 billion in its initial public offering, making it the largest IPO by a Canadian company in the U.S. in nearly two decades.
3. Pineapple Energy (NASDAQ: PEGY)
Pineapple Energy (NASDAQ: PEGY) is engaged in the business of developing, owning and operating renewable energy projects. The company is focused on developing, owning and operating renewable energy projects that provide clean, affordable and reliable power to communities and businesses.
Pineapple Energy's strategy involves growing its portfolio of renewable energy projects through a mix of organic growth and acquisitions. The company plans to grow its portfolio primarily in the United States, with a focus on the states of California, Texas and Hawaii.
4. Crown Electrokinetics Corp. (NASDAQ: CRKN)
Crown Electrokinetics Corp. (NASDAQ: CRKN) engages in the research, development and commercialization of nanotechnology-based solutions for the electronics and semiconductor industries.
The company's nanotechnology uses electric fields to manipulate and control materials at the nanoscale level. This technology can be used to create new and improved materials for use in semiconductors, batteries, displays and other electronic devices.
5. Xos Inc. (NASDAQ: XOS)
Xos Inc. (NASDAQ: XOS) is a leading provider of digital technology solutions. The company's products and services are used by major corporations and government agencies around the world.
Xos’s products and services are used in a variety of industries, including health care, finance, retail and manufacturing. Their solutions are designed to help organizations improve efficiency, reduce costs and increase customer satisfaction. Xos’s flagship product is its Xos Digital Platform. This platform enables organizations to create and deliver digital experiences to customers.
Understand the Risks
Penny stocks are one of the most volatile and risky investments available. These stocks are generally found on the over-the-counter (OTC) market. Penny stocks may seem like a tempting investment due to their low price point but they come with a high degree of risk.
Here are some of the most significant risks associated with penny stocks:
- Lack of liquidity: One of the biggest risks of penny stocks is the lack of liquidity. This means that it can be very difficult to find a buyer for your shares, especially if you need to sell quickly. This can lead to big losses if you're not able to unload your shares before the price starts to drop.
- Price manipulation: Another big risk with penny stocks is the potential for price manipulation. Because there is often very little trading activity in these stocks, it doesn't take much for a few large investors to artificially drive up the price. This can lead to unsuspecting investors buying in at the top, only to see the price quickly drop back down again.
- Lack of transparency: Another issue with penny stocks is the lack of transparency. This is due to the fact that many of these companies are not required to disclose their financial information to the public. This makes it very difficult to know what you're actually investing in and it's one of the main reasons why these stocks are so risky.
- No analyst coverage: Another thing that makes penny stocks so risky is the fact that there is often no analyst coverage. This means that nobody provides objective research on these stocks, which makes it harder to make informed investment decisions.
- Poor governance: Many penny stocks are also risky because they have poor governance. Many of these companies are not well-regulated, which can lead to a variety of problems. For example, they may be victims of insider trading or other types of fraud.
Overall, penny stocks are a very risky investment. If you're thinking about investing in these types of stocks, it's important to be aware of the risks involved because there is a good chance that you could lose all of your investment.
Can You Get Rich Off Penny Stocks?
Some people have made a fortune by investing in penny stocks, while others have lost everything they put into them. Penny stocks are generally considered to be very risky investments, and most financial experts would advise against putting any money into them.
However, there is always the potential for huge rewards, which is why some people are drawn to them. If you're thinking about investing in penny stocks, you should be aware of the risks involved and make sure you have a solid plan in place. You should also be prepared to lose all of your investment.
Consider the Potential and Be Aware of the Risks
Now that you know the answer to "What are penny stocks?" and can define penny stocks, are you ready to trade? High profits can be achieved through investing in penny stocks, but it is crucial that you understand the risks because they can also lead to significant losses.
Have a risk management plan in place and do your research carefully before buying penny stocks and know when to cut losses and take profits.
FAQs
How much do I need to start trading penny stocks?
There are a lot of factors that go into the amount of money that you need to start trading penny stocks. Some of those factors include the broker that you use, the trading platform that you use, the type of penny stock that you're interested in and your personal risk tolerance.
In general, you should have at least $500 to start trading penny stocks. This will allow you to buy a decent number of shares and not have to worry about the commission fees eating up all of your profits. Of course, there are always exceptions to the rule. If you're only interested in buying a few shares of a penny stock, then you could get away with starting with less money. However, we generally don't recommend going below $500 when you're first starting out.
Are penny stocks risky?
Penny stocks are generally considered to be high risk investments. This is because they are often associated with small, unproven companies with little to no history or track record. These companies may be more likely to fail. Investors may have a hard time getting their money back if they do.
Can penny stocks be profitable?
Penny stocks are a high-risk investment, but they can be profitable if you know what you're doing. Many people lose money on penny stocks, but there are also many success stories. To be successful in penny stock investing, you need to do your research and be patient. You also need to be willing to take some risks. Penny stocks are often volatile, so you need to be prepared for the ups and downs. If you're not comfortable with risk, penny stocks may not be the right investment for you and you may want to turn to our most active stocks instead. However, if you're willing to take a chance, penny stocks can be a profitable way to invest your money.
