Stocks are expected to end this year only modestly higher after last year's 30% gains, prompting investors to hunt for growth. One way to find it is by learning how to trade penny stocks.
Defined as stocks that trade under $5 a share, penny stocks have gotten a bad rap thanks to scams and manipulators. However, there are plenty of legitimate microcap companies offering lucrative opportunities.
The appeal of trading penny stocks is that they don't cost much money, yet the rewards can be substantial for those willing to take on additional risks.
The key is finding those with healthy prospects and knowing how to trade shares.
Trading low-priced stocks calls for a strategy. With that in mind, here's how to trade penny stocks.
How to Trade Penny Stocks: What to Do Before You Buy
Respect Risks: First and foremost, remember that trading penny stocks involves risks. Prices are volatile and, if traded on the Pink Sheets, companies aren't required to disclose as much information as if they were listed on an exchange. Be prudent with any penny stock investment, and never invest more than you are comfortable losing.
Disregard Hype: Approach penny stocks with caution, and be suspect. Ignore puffed-up press releases that tout explosive gains. Paid promoters are typically behind those unsolicited junk faxes and high-end glossy mailers pushing a microcap company. Do your homework. Information is your best tool. If you can't find any data, move on – quickly.
Hang Up the Phone: If you get any calls plugging a low-priced stock, hang up – after you insist your name be added to the "do not call" list. This high-pressure tactic is common.
How to Trade Penny Stocks: Deciding What to Buy
Buy the Cream of the Crop: Investors have thousands of penny stocks to choose from, but really good ones are rare. Keep an eye out for companies that post solid earnings, have secured new contracts, have heavy insider buying, and/or are breaking out to 52-week highs on volume of at least a quarter million shares a day. Take a look at the top 10 penny stocks for January 2014 for examples of what a stock fulfilling these criteria looks like.