In order to get started with penny stocks trading, open an account for online investment with a reliable and reputed broker. You can find many investors who are specialized in OTC market where they trade all penny stocks. For a minimum amount of trading commission, you can open an account with some brokers. Before starting, note down the following tips and suggestions for penny stocks trading.
Penny Stock Trading – Tips & Warnings
– Beware of “pump and dump” schemes. Several PR firms and shady stock traders use it to manipulate stocks and inflate the value of stock with misleading or false statements in order to trade their stock in higher amount. Hence, investors lose and price falls once overvalued shares are dumped by the operators. Several newsletters and email spam campaigns practice this scheme.
– As a beginner, you should know that penny stocks can be bought over the counter, instead of Nasdaq, New York Stock Exchange or other markets where transparency and control is more. Only problem is that the securities in OTC are confidential. Hence, no central exchange is there to the market. Due to lack of proper company information, one can easily manipulate the stock.
– Compare price with earnings for the stock of the company when it comes to trade penny stocks. Divide the price of each share with its earnings from each share. As an example, if the cost per share is $40 in a company and you could earn over $1.5 in each share, the price-to-income ratio must be US$26.66 (divide $40 by $1.5). With P/E Ratio, you can evaluate whether stock is undervalued or overvalued. Also compare this ratio of a company with others of similar industry and get better insight about the performance of the company.
– Also consider looking at income from price to growth ratio and evaluate the stock value when it comes to consider the growth of its earnings. For high growth rate, you will usually find higher P/E ratio of the company. In order to determine the potential value of the stock, consider using PEG ratio. Several analysts use it and give it more preference than P/E ratio due to its relevance to growth. If you just use P/E ratio, it will just overvalue the companies than others. In order to get better ratio to compare companies with varied rates of growth, you should divide P/E ratio by PEG rate.
– Keep in mind debt ratio of the company. It is a clear indicator of the part of debt related to the assets of the company. No wonder, less debt of the company means more assets and better value. In debt load, you can get the insight of possible risks faced by a company.
– Determine the flow of cash of a particular company that is important for solvency. For survival of the company, cash flow is important. If the company has proper cash in hand, it means that company pays its employees, creditors and others timely. Not having enough cash in hand means insolvency of the company and it may go bankrupt at any time.