Or the past few years, all signs have been pointing to a possible global recession. The hope of a stable stock market that investors held on to has slowly been crippled, following the inception of the worldwide coronavirus pandemic. It has thrown most investors into fear as the anticipation of a coronavirus-related recession continues to grow.
As a result, most traders are only willing to get involved in the stock securities market without spending too much money, making penny stocks a suitable investment choice. But what are penny shares, and how do they work? This article explains the basics of penny stocks, how they work, and how to choose the best penny shares for trading in 2020.
What is Penny Stock?
Penny stocks, also known as penny shares, refer to low-priced shares that get publicly traded with a small market capitalization. Typically, penny shares gets valued below $5 in the United States and below £1 in the UK.
The definition of penny stock as a stock with a share price below $5 has been formally documented by the Securities and Exchange Commission (SEC) of the United States, as they got previously valued at under $1.
Most of these shares are transacted via the OTC Bulletin Board, although some get traded on significant exchanges.
In the UK, on the other hand, there is no formality as far as the definition of penny shares is concerned. However, penny shares get generally considered to trade below £1, with most of these penny stocks transacting on minor stock exchanges, such as AIM.
Note that due to their low share pricing, penny stocks are likely to be highly speculative investments. They get regarded to be highly volatile securities with higher risks of investment and a high probability of growth.
Smaller companies issue most of the penny shares without much reputation of trading, which explains why they are cheaper than other securities.
How Do Penny Stocks Work?
Just like any other stock, investing in penny stocks involves buying into the ownership of a specific company through shares. Meaning that as the value of the company in question increases, so does your stock, and the vice versa is also true.
The difference with penny shares is that they come with added risks due to their susceptibility to higher price swings as well as having less liquidity. They are also issued by unproven and highly speculative companies, making them riskier.
The good thing with penny shares is that with considerable low capital, such as £1,000, you can have large trading volumes of the stock, giving you a significant share percentage in a growing company.
There are plenty of companies that evolved into large brands, having started as penny stocks, which means that the growth of the company from which you purchase penny shares could generate significant earnings in the future.
Traders who invest in penny stocks earn profits through dividends or by selling them at a higher price than they initially bought the shares.
How to Buy and Sell Penny Stocks
The most common way through which investors buy or sell penny stocks is the penny stockbrokers. It is not possible to purchase shares from a company directly.
Here is where penny shares brokers come in handy. These brokers act as middlemen between the selling company and the investor buying the shares. Once you have purchased your ideal number of penny shares, you can trade them online through a desktop platform or a penny stock trading app.
How to Trade Penny Stocks
In most cases, penny shares come without regulations. As a result, selling and buying penny stocks is often subjected to scammers and manipulators. Therefore, traders need to exercise due diligence when investing or trading penny stocks.
This step by step guide gives an overview of how to go about penny stock UK trading.
1. Decide on the types of companies to invest in
Penny shares get typically linked to small companies without any reputation. However, you do not have to necessarily go for the new companies or those without any track record.
Do your research well, and pick companies that have a promising future as far as earning profits is concerned. Look for financial records, such as the company’s balance sheet or financial statement, to establish its current value.
2. Do your research
Look for reliable and reputable sources of information to settle on the most suitable penny shares for your investment. Unscrupulous people are known for presenting misleading information about the stock prices for specific companies, after which they trade their shares at higher rates for high profits.
3. Conduct a Technical Analysis of the Market
The penny shares market is known to experience high price fluctuations of up to 20%, coupled with extreme volatility. Therefore, it is critical to conduct a technical study on the market before concluding on your trading decision.
You cannot invest in penny shares just because there is an online wave of numerous traders moving to the trade, and you do not want to miss out. An analysis of the market gives you insights into the best shares for your needs. Consider using tools, such as a stock screener, to enable you to filter penny stocks as per your defined requirements.
4. Get a suitable online brokerage or trading platform.
You will need a platform that offers a wide range of choices of penny shares. You must be keen to observe the costs associated with trading individual penny shares.
High fees can eat up on your earnings, which is why you must go for providers with the lowest cost per trade. If you are interested in trading the movement of prices of penny shares, then a platform with real-time accounts is what you need.
5. Get Started
To get started, you will need to decide on whether you want to sell or buy. After making your choices right, you can place your first trade or initiate your first investment.
For example, if you are anticipating a fall in the value of penny shares, then you can go short and sell, a process known as shorting or short selling. If you are anticipating a rise in the value of the penny stocks, on the other hand, then you can ‘long’ and buy, a process known as long buying.
6. Risk Management
The penny stock market comes with very high risks. Investors must, therefore, employ all the necessary risk management strategies to lower or mitigate these risks.
7. Monitor and Close Your Position at the Right Time
After placing your trade, it is essential to keep track of the stock’s price movements. If your penny stock position is where your profits got generated from, then you might want to close the position upon the achievement of the targeted price.
Over the Counter Bulletin Board (OTCBB) and Pink Sheets
These are listing or quotation services used by penny stock companies to display the sale prices, real-time quotes, and any other information concerning securities traded in the OTC markets.
Without these services, investors can’t establish the movement in the prices of penny shares. You will need to know the prevailing rate of a stock if you have intentions to purchase the shares. Making the two services essential sources of information as far as the prices of penny shares are concerned.
How to Choose the Best Penny Stocks
Every trader is after penny shares with the best return on investment. But how do you pick the penny shares with the best earnings? Here are some tips for you.
1. Scrutinize the Company
Firstly, look for the significant percentage gainers in the penny shares market. Once you come up with a list of some of the most promising penny share companies, then you can research each of the companies.
Looking for insights into the company via google, company website, reviews, and addresses can give you an overview of the company you wish to engage.
2. Consider the Long-Term Chart
When choosing the best company for penny shares, you must avoid one-time spikers, as they can fool you into a trade of losses. Evaluate the long-term charts to establish whether the company has a reputation of multiple-day runs.
3. Check the Penny Stocks’ Volatility
Penny shares get generally considered to be extremely volatile compared to other forms of shares. However, as a trader or investor of penny shares, you want to go for the fast-moving stocks.
While the volatility of penny shares can be disadvantageous, experienced traders consider it to be a good thing, as volatility reflects price movement. Today, there are plenty of modern tools that you can use to establish companies rated as gainers for a profitable investment.
4. Examine the Catalysts
The other element to consider is the issues or factors that trigger the price of penny shares to move. For example, the cost of these shares may get influenced by the introduction of a merger or a new contract.
Penny Shares to Watch in 2020
Here is an outline of the best penny shares that have generated some of the most significant percentage gains on the traded stocks in 2020.
- AFC Energy
- Oracle Power
- Dillistone Group
- Stanley Gibbons Group
- Richland Resources
- Eurasia Mining
- Image Scan Holdings
- Infrastructure India
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.