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Advice Regarding Buying Penny Stocks

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Buying Penny Stocks | An Overview

buying penny stocksBuying penny stocks is not difficult at all; however, for those unfamiliar with buying penny stocks there are some things that must be understood about penny stocks to avoid making mistakes.  The main differences between buying penny stocks and buying stocks that are listed on major stock exchanges include:  the amount of information available for penny stocks, the amount of shares purchased when buying penny stocks, the liquidity of penny stocks, and the nature of penny stock trading and price movements.

Keep These Tips In Mind When Buying Penny Stocks

Before buying penny stocks, due diligence must be done on penny stocks under consideration for purchase.  The types of things to look for when doing due diligence on penny stocks include:  the number of authorized shares, the number of shares in the public float, how quickly the number of authorized and public float shares have grown, and whether the company has done reverse splits in the past.  What you want to look out for and avoid is penny stocks that have a huge number of authorized or public float shares, or companies that have done a number of reverse splits in the past.  These are signs of penny stock companies that are diluting their shares and have limited upside potential in the long run.

If you have determined that the rewards outweigh the risks and want to buy a penny stock, there are a number of things to keep in mind regarding the process of buying penny stocks.  First off, make sure your broker is able to handle your penny stock buy orders, as not all brokers handle all penny stocks.  Second, get ready to break out a calculator, because due to their low price, buying penny stocks often involves buying thousands and even millions of shares at a time to initiate a sufficient position.  Third, it is highly advisable to using limit orders when buying penny stocks because penny stocks often have limited liquidity and buying them using market orders can result in unfavorable fill prices.

It is important to have an exit strategy in place when buying penny stocks.  Even if you intend to invest in penny stocks for the long run instead of trading them, you want to ensure that you can exit your penny stock position when the time is right, which means when the penny stock has reached your target price and there is buying interest.  For that reason, it is a good idea to either enter a sell limit order or set a price level that you would be willing to sell the penny stocks that you buy, after you purchase them.

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