Penny stocks are considered potentially risky. But they also present the opportunity for big gains.

What are penny stocks, and how do investors choose those that are profitable? And how do investors decide on the best penny stocks to watch and the most profitable penny stocks to buy now?

What Are Penny Stocks?

Penny stocks are shares of stock that trade for under $5. With shares under $5, penny stocks typically have a higher level of volatility, but they also have a higher potential for reward.

Historically, penny stocks traded for less than $1 per share. The Securities and Exchange Commission (SEC) modified the definition to include all shares selling below $5.

While penny stocks sell for under $5, you still might have to put more than $5 in your account if you’re just getting started, as brokers often have different account minimums. It’s worth investigating broker fees and avoiding offshore brokers altogether if you’re just getting started investing.

Penny stocks carry higher risk than regular stocks. These stocks are great trading vehicles, but are not generally considered long-term investments. (Of course, there are always exceptions.)

While some penny stocks trade on the large exchanges such as the NASDAQ or NYSE, most do not. Some penny stocks trade OTC (over the counter). OTC are how stocks trade when they aren’t listed on a major exchange like NASDAQ or NYSE. This is typically where smaller companies trade when they can’t meet listing requirements of a bigger exchange, like having a certain number of publicly traded shares and a certain minimum price per share.

The cons of trading stocks OTC is that they tend to have low volume, so you might not be able to get the sale price you want when you go to sell – or worse, not be able to sell at all.

Something else to watch out for is when stocks are known as “Pink Sheet listings.” These are stocks that have the least regulatory oversight and liquidity. They are not required to file financial information with the SEC, so investors don’t always know exactly what they’re buying. This can make these companies less reliable as investments than those that have traded for years on a regulated exchange.

Researching Penny Stocks to Watch

Because penny stocks tend to be volatile, and because the companies that list penny stocks frequently do not file with the SEC, investor research and due diligence is important. It’s also typically recommended to focus on penny stocks that are listed on a major exchange.

Research will help you choose which penny stocks to watch as potential “buys” to help investors meet their profit goals. When looking at penny stocks, there are several pieces of valuable information that can help.

Investors should first be familiar with the market sector that a penny stock is in as well as the industry of the company.

Investors should examine press releases and a company’s announcements. These documents can provide information about new contracts, positive earnings, or, in the case of biotech, news of test results, and can forecast potential gains. This can help investors spot companies that are just formed or might be heading for bankruptcy.

Another way to research penny stocks is to look for big percent gainers. Penny stocks that are on the move are penny stocks to watch. And a long-term chart with the historical information of a penny stock’s performance can tell you if a stock has been climbing steadily higher or been extremely volatile.

Stock liquidity is also important. Because penny stocks are usually associated with small companies and infrequent trading, they may have a lack of ready buyers in the marketplace. A lack of ready buyers means that selling stock can be difficult, and lowers the liquidity of the shares. Investors should look at a penny stock’s volume to make sure there’s enough daily activity should they want to sell their shares. They should also make sure that the price of the shares accurately reflects the market. A high price with not much volume is a warning sign.

Penny Stocks to Buy Now

Different industries thrive under different economic conditions. When deciding which penny stock to buy, an investor might consider if the current economic environment benefits the company’s industry.

For example, penny stocks to buy now are in industries like e-learning, food delivery, tech and biotech because of the global pandemic. Tech companies are creating innovative solutions to current problems, such as how to enable employees to work more effectively from home, and these companies may be developing the next solution for remote collaboration.

Follow Money Morning for continued info on how to successfully trade penny stocks, understand the process, and get lists of penny stocks like these to buy now.