Four Tips for Buying the Right Penny Stocks

Penny stocks can be a great way to get into the stock market. Even if you’ve been in the stock market for a while, they can be a great way to diversify your portfolio. However, their unique nature means it’s a good idea to approach your penny stock expectations with realism.

You aren’t going to get rich overnight.

But, there are a few ways you can increase your chances of choosing the right penny stocks, which will increase your chances of experiencing a big payday.

Screen Your Stock Options

Because penny stocks are so cheap, you may be tempted to visit message boards and forums, choosing the stocks that seem most appealing. If you want your investment strategy to be successful, this isn’t the strategy to choose.

Instead, use a stock screener.

With some screeners, you can find companies not listed on major exchanges, and some have a large quantity of penny stocks. You can even filter your results based on:

  • Intrinsic value
  • Growth, earnings, and revenue
  • Dividends
  • Cash flows

Consider Support and Resistance Levels

The technicality of choosing and investing in stocks may be intimidating, but a little analysis can go a long way. One simple way to make informed decisions is to consider support and resistance levels.

In short, buying stocks after the shares fall down and then bounce back up (support level), and then selling before they fall back down (resistance level) is a good rule of thumb to follow.

Choose Stocks With Liquidity

To increase your chances of success trading penny stocks, you have to look at liquidity. The most liquid stocks are the ones that sell the most shares.

Avoid illiquid penny stocks that only have a few stocks with just hundreds or thousands of dollars traded per day. They are the most likely to experience extreme volatility, especially since there are likely to be so few buyers when you’re ready to sell.

Instead, ensure your stock is liquid enough to buy and sell at a fair price.

But, more liquidity isn’t always better

You may be tempted to look for the most liquid penny stocks you can find. That’s not a good idea either.

Some highly liquid stocks may go up 50 percent or more, which may seem like a good buy, but stocks with a massive surge like that are more likely to correct in price. As a matter of fact, the worst performing stocks are usually the ones that jumped in price on very high volume! It’s best to stick to stocks with some liquidity, but not too much.

That means buying stocks that previously went high, but are trading at a decreased volume, or stocks that are trading down in price.

Buying the right penny stocks can be an intimidating process, so don’t hesitate to get your feet wet by purchasing just a few shares to get started. Once you see how the market works, your confidence will increase and you can actually make money on stocks that so many other people ignore.