Learning how to find the right stocks for trading takes time. It must be understood that cheap penny stocks are not always suitable for strategies that apply to ordinary securities. Most of these companies are relatively small in value and there is not always enough data available. Therefore, a different set of criteria should be applied when trading such securities. What works well for blue chips may not work well for cheap stocks.
Many experienced traders include such securities in their long-term portfolio. For many ordinary investors, this is dangerous, but professional traders understand that penny stocks can provide a decent return on every dollar invested.
However, you need to be aware of the following: risks should be contained by quickly cutting off losses. A major profitable transaction may occur sooner or later, but several factors are needed:
- Patience
- Willingness to cut off losses quickly
Rules for finding cheap stocks to buy
It is necessary to consider what rules a trader should follow before starting to work with them. It will allow you to correctly evaluate the situation and select shares for trading.
Rule №1
First, look out for penny stocks that are listed on so-called “pink lists”. This is a high-risk market. The fact is that shares from over-the-counter (OTC) markets represent companies that are not subject to requirements for mandatory reporting to the SEC.
Rule №2
Low-cap stocks aren’t the best to pursue in terms of dividends. If you are familiar with the common stock market, then you probably know that dividends are a good source of income if they are paid by a blue-chip company that plans to stay in the market for a long time. If a cheap stock pays dividends, then it will most likely be only a one-time payment as they don’t usually have the financial stability to support this.
Rule №3
As with any stock, you need to pay attention to the company’s earnings and any upward trends. Here you will encounter two difficulties. The first is related to the fact that it is difficult for such a company to find a profit declaration. For many of them, this type of data does not even exist, since they are not required to submit such reports.
The second problem is that you need to be aware that there is a reason such companies are offering their shares at cheap prices rather than at regular prices. And the reason is not that this company has proven itself in the past. You need to understand that you may be dealing with a company trying to make a comeback. Therefore, there is usually a lot of hype and forecasts for the surrounding future. It must be taken into account when selecting the right cheap stocks for purchase.
Rule №4
Consider using limit orders. If you mistakenly submit a market order when a trading signal occurs, there is no going back and you could lose a lot of capital. Before making a deal, always pay attention to the spread. The penny stock market is characterized by low liquidity.
Rule №5
Consider using stop-loss orders when placing a trade. This is not just applicable to penny stocks; the same can be recommended when working with blue chips, even. When a stop order is triggered, you too can run into a lack of liquidity, so you should always consider the possibility of poor execution in your trading plan.
Rule №6
Before trading a stock, you should always know the target price level. Upon reaching this goal, you can then decide whether to exit the trade and take the profit.
Conclusion
It must be remembered that many traders lose money when they take a position on a penny stock. In addition, the risks for these types of securities are somewhat greater than in ordinary ones. All of these risks should be taken into account when selecting potential candidates for purchase.
Acting carefully and in accordance with common sense, you can find the right solution. By developing the right habits, accepting what the market gives, and not trying to go against the market, success can be achieved.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
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