Top Market Tips for Penny Stocks

Those who want to make the most of their personal income would do well to consider stock investment. Of course for many average folks the stock market is an intimidating, monolithic entity a world apart from Main St. But even though the stock market can seem like a foreign language, that’s no reason not to learn it. And that goes for penny stocks as well.

And while it’s true that the stock market is a central hub where vast amounts of money are converted in a seeming haphazard fashion, that doesn’t mean there aren’t strict rules that govern it. That also means having a full understanding of how this system works increases the investor’s chance to be successful in the market. Basic guidelines for the new investor, such as thoroughly researching companies they intend to invest in, certainly provide a solid foundation, but there are other things to keep in mind as well.

With that in mind, here are some broad tips geared towards giving the new investor an idea of what to look for in order to choose the best penny stocks in the marketplace. Penny stocks are stocks that trade for less than $1.00.

Watch For The Annual Low

Penny stocks are different from blue-chip stocks in quite a few ways. For example, while blue-chip stocks have a habit of moving in one direction at a relatively stable pace, penny stocks are more volatile and their prices will fluctuate. This usually leads to investors selling these penny stocks for a profit once they reach their yearly high. This, of course, then drives the price of stock down. The trick is picking up these stocks once they hit their yearly low. This getting-in-on-the-ground-floor method is often very successful, as once buyers re-enter the market the stock price will rise again.

That being said, sometimes the yearly high of a penny stock will be sustained, and this will in turn attract more investors, pushing the price ever higher. It’s important to try and spot this trend when it occurs. This trend is more likely if the company having a particularly solid foundation or it makes a positive announcement regarding new developments or earnings.

Watch For Price Dips

Because penny stocks are volatile, it’s not uncommon for their price to temporarily drop. This is often caused by the dip in price of a similar stock or because of an overall drop in the OTC (over-the-counter) market. It’s important to look not only at the drop of the penny stock but for signs of recovery as well. It’s also vitally important to know whether or not the drop was due to the company’s performance or because some other outside element.

Search Out High-Volume Penny Stocks

It’s difficult to trade penny stocks at the optimum price when low-volume, small trades are impacting the overall share price. That’s why it’s important to shift focus to high-volume penny stocks, which allow the investor to make major trades without affecting the price. This is because as trading volume increases, so does increased market competition as well as a narrowing of the price spread. In the end, those who set the market are competing against one another, which narrows the gap between buying and selling prices. A narrow spread such as this makes it very easy to make money on high-volume penny stocks.

These are just a few things to keep in mind when entering into the world of penny stocks. There will likely be a slight learning curve at first, but over time – and after enough trades – the newbie investor should have a solid feel for the marketplace.

Amy Johnson is a professional blogger that writes for Diamond Consultants, one of the nation’s leading financial advisor recruiting firms.

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