Penny stocks come with high risks and the potential for extraordinary returns, so investing in them requires care and caution.
While the risks associated with trading penny stock trading are high, investors can make money, which is why penny stocks are still traded each and every day.
What are Penny Stocks?
Penny stocks in Nigeria are ultra-low-cost stocks that you can buy and sell for less than 50 kobo to 1 naira per share. This means they are often bought and sold in high volumes. Even though this kind of stocks may look cheap, they come with high risk and volatility.
The allure of penny stocks is simple: They don’t cost much money and promise big profits. Some penny stocks have very low volume, which means that it can be very difficult to buy and sell shares of these stocks. Other penny stocks are very volatile and have huge up and down price swings.
Penny stocks fraud.
The most common way penny stocks are manipulated is through what is known as “pump and dump” schemes. The company will pay penny stock promoters to blast hundreds of thousands of emails and post on social message boards fake news and falsified information about the company to generate excitement and encourage unknowing investors to buy. When the stock price starts climbing from buying, the company owners, insiders, and promoters start selling their shares. Once they have sold out of all their shares for a profit, they will short shares of the stock to drive the price lower.
Tips on how to trade Penny Stocks.
Penny stocks are considered highly speculative (and high risk) investments due to their lack of liquidity. These 3 tips on how to trade penny stocks will serve as a guide for you.
1. Limit your holdings and diversify.
Don’t be excited about the prospects for your favorite penny stock, you still need to protect yourself. Cap your losses by limiting your holdings in the stock to no more than 1% or 2% of your overall portfolio. It also makes sense to diversify your penny stock portfolio, which shouldn’t exceed 5% to 10% of your overall portfolio, depending on your risk appetite.
2. Check liquidity and trading volumes.
Even if you’ve made a successful investment in a penny stock, you’re going to need to be able to sell your shares. You should have adequate liquidity and trading volumes in the stock so that you can trade it efficiently. Otherwise, you may wind up in a situation where there are few buyers and wide bid-ask spreads, making it nearly impossible to convert your paper profit into an actual one.
Also Read: 5 Tips To Be A Successful Forex Trader.
3. Know when to sell your penny stocks.
It’s very rare for a penny stock to be a long-term buy-and-hold investment. The sector is built on short-term trades, so it’s as important to know when to sell as it is when to buy. If you notch sizeable gains over a short period in a penny stock, consider booking them now rather than waiting for bigger profits that may never materialize.
Penny-stock trading thrives for investors who can’t afford shares of Google or Apple, but you need to be aware of the pump and dump schemes and the stock promoters who act as shills to manipulate the penny stock price. The bottom line is that you need to be very careful how you trade penny stocks and you have to use the best penny stock strategy to survive in these shark-infested waters.