Ever since the pandemic hit, the market and trading environment have been volatile. However, if you want to keep with the ‘madness’ of the world of the stock, perhaps trading in penny stocks might be a good choice for you. Below you will find the top three types of penny stocks that are worth trading.
Fundamentally Strong Companies
The disclosure of information of Penny Stocks is very different than regular stocks, making it even more important for investors to completely investigate as deeply as possible any possible prospect of investment.
It is keen for traders to understand the business model the company has since it could identify opportunities and decline others. Management is another important fundamental to be reviewed prior to investing, at the end of the day these are the executives that hold the responsibility to oversee the company and will ultimately fall on them the responsibility of leading the company towards a profitable stage or in a negative scenario to become part of the bankruptcy list of penny stocks every year.
High Volatility Stocks
Depending on the trading strategy that you may be implementing, volatility will either make you or break you in the process. As a long-term investor, you want to see positive volatility in your penny stocks, since it means there are more traders getting involved watching and trading the stock. This could lead to institutional players putting their eyes on the company.
If you are a day trader volatility could play as a great opportunity giver when the price swings are due to a specific catalyst or simply based on technicals. The real issue becomes when the volatility is the result of random swings without visible patterns, making trading a complete nightmare if the size of the positions is not adequate to tolerate these swings.
High Volume and Liquidity Stocks
The volume is calculated by the number of shares traded on any given session, this indicator is commonly used for Penny Stocks picking since it can provide a better view of the interest of traders to buy or sell any outstanding shares in the market.
A golden rule in order to avoid being stuck in stocks with low liquidity is to avoid any stock trading under 500,000 shares a day, and if you are willing to take more risk you could lower to a minimum of 200,000 shares traded a day, anything below could potentially become a trap, causing you to have problems trying to sell the stocks.
Speculative Investment
There is a big difference between what is possible and what is probable to happen at any single moment in the financial markets, in reality, anything is possible, what really makes the difference when making a decision are the probabilities of one thing happening over another one.
One could say that a Blue Chip Company that is a key part of the Dow Jones Industrial Average Index could hit zero in the next six months, it is always a possibility for a scam or external event to happen and take down the price of a stock. In reality, the probabilities of this type of insert taking place are very slow and in some cases non-existing.
In the penny Stock market, things turn a little bit more difficult to evaluate due to all the uncertainty and the increased probabilities behind a stock going bust. Any long-term investor taking a position in a Penny stock should contemplate the possibility and the probabilities that his/her investment may end up going to zero, making position sizing and risk management requirements to survive this market.
Conclusion
Before even thinking about investing in any Penny Stock it is important for investors to understand their market profile and their risk appetite. As mentioned before this specific asset class has its own peculiarities and characteristics that make it extremely volatile and long-term investors should keep in mind that the value of their shares could be severely damaged if things go south, a value of zero is always a possibility to keep in mind.
Do your research, understand the companies and their entire business model, their management, products, competitors, this will help you get involved and will give you a clear view of which companies are worth taking the risk of investing in.
The market is full of incerto events that could turn losers into unicorns faster than you can imagine, it’s your responsibility and ultimate goal to research enough to find these opportunities.
