Last updated on September 21st, 2022 at 11:45 pm
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The stock market, on average, provides 7% in returns before factoring in dividends. But, not everybody can meet the investing requirements of large brokers, such as Vanguard, with investments starting at $3,000 and lower-fee Admiral shares starting at $10,000. So, how can you ever get into the stock market and start letting your money work for you, rather than you working for your money? The answer is investing in the best penny stocks.
Penny stocks have gotten a bad rap over the years, but if you are educated, the returns can be astronomical. The purpose of this article is to inform you about this type of stock, to see if there is a point in investing in them, and five tips to help you see massive returns by the end of 2019 by investing in the best penny stocks.
What Are Penny Stocks?
Penny stocks are a misnomer. The stocks do not always sell for a penny a piece, but they trade at rock-bottom prices, normally for less than a dollar. Penny stocks are non-traditional stocks which trade for fewer than $5 per share. These stocks are not regulated by the SEC, like stocks on the NASDAQ or New York Stock Exchange, but that does not mean they are scams. These stocks are traded on major exchanges and can be found on the Over-the-Counter Bulletin Board. Penny stocks are also common on foreign exchange boards, but they can be found on major stock exchanges such as the NASDAQ or NYSE. These penny stocks sell for under $5 apiece just like over-the-counter penny stocks, but they have to follow all SEC and other regulations regarding reporting standards and other requirements.
Finding the Best Penny Stocks
Beware of e-mails from gurus telling you which penny stocks to invest in. If a so-called guru blasts a recommendation for a stock, they already own up to 10,000 and are looking to invest in a penny stock; a majority of those e-mail recipients will buy the stock, which drives the price up. When the price surges, the guru gets out and laughs all the way to the bank. The SEC requires all of these so-called experts to include a disclaimer at the bottom of their e-mails. Read the fine print carefully before jumping on a penny stock based on a professional’s recommendation.
Look for penny stocks selling around their 52-week high. It may be helpful to sign up for newsletters of stocks to look out for just to see if the price has surged due to a recommendation made from a guru. Another way to protect yourself is to look at the earnings of a company if this information is available. Be choosy when investing in penny stocks. While it is not federally mandated for companies offering penny stocks to publish financial statements, invest in only companies who provide this information. Look for a history of generating profit and any auditor’s notes.
To find the best penny stocks, be patient. Do not just jump on a stock because it has spiked a little from close last night to open this morning. Watch it carefully for a week to monitor how it trades, especially if its price skyrockets on a Friday. This is a good sign it is being pumped up so people with large positions can dump it and leave their uneducated followers holding the bag. Make sure this stock is experiencing adequate trade volumes. Winning penny stocks have a daily trade volume of at least a quarter million shares daily.
If at the end of this article you decide you want to dip your toe into the penny stock market, we would like to give you our top pick for 2019. We recommend ARC Document Solutions which trades under the ticker symbol ARC. We have not received a penny in compensation from them to promote their stock. The company is currently valued at $194 million dollars and generated $428 million in revenue in 2017. Mutual and hedge fund managers own 75% of this company’s stock and 17% of the stock is owned in the form of employee shares. This means that only 7% of ARC stock is available for day traders. This company’s shares are priced on the higher end of penny stocks at $4 per share, which gives it more credibility and weight than companies selling stocks for pennies.
ARC is used by engineers, architects, and construction professionals. These industries are not going anywhere. This stock historically trades 2.5 times more frequently than the average market. This opens the door wide for an opportunity. Besides the future security of the business and its product, what really won us over was the company’s financials. Total assets are $466 million, and total liabilities are $263 million. This means the company has $203 million in equity. Furthermore, in 2017, this company earned $97 million in net profit. This company is a cash cow and has enough liquid capital to aggressively pay its debts off and buy its shares back from the open market.
Is There a Need to Invest in Penny Stocks?
Have you ever found a dime on the ground and picked it up? What if you picked up that dime and invested in into 12.5 Bitcoin in 2009? That $0.10 would now be worth $52,500. This is the allure of penny stocks. While there are success stories of people getting in on the ground floor with companies such as Google and Apple and retiring at 35, this is not what penny stock trading is all about.
What Is the Point?
The point of investing in penny stocks is diversifying your portfolio. You can invest in many more markets when shares are $3 a piece, rather than $200 a piece. This comes into play on a couple levels. Invest only one to two percent of your portfolio in one penny stock. Your penny stock portfolio should not be more than five to 10% of your overall portfolio depending on your financial goals. These are not stocks you buy to earn enough dividends to retire.
Penny Stock Investment Tips
With the absence of balance sheets and other financial statements, you may wonder how you can possibly pick the best penny stocks. Today, we will share with you five tips to find the winning penny stocks of the year.
1. Piggyback on Moving Stocks
The best penny stocks have already spiked a little.
2. Focus on High Volume Shares
The best penny stocks have already spiked a little.
3. Limit Your Position
Do not trade over 10% of the stock’s daily volume. This means, if a stock is trading 250,000 shares per day, do not purchase more than 25,000 shares. Keeping your position on the small side makes it easier to get out, particularly if the price is falling.
4. Sell Quickly
If you purchase a stock at a dollar and within the next few days it is selling at $1.20 or $1.30, get out. You will not make a living off of holding onto the best penny stocks waiting for a 1,000% return.
5. Use Mental Stops
Set a limit for yourself and stick to it. Some people perform risk-reward analysis to determine where their mental stops are. For example, if you want to earn a dollar on a three dollar stock, cut your losses at 25 cents. This gives you a 4:1 risk reward. Once you have earned your dollar, get out. Similarly, sell your stock if it drops below $2.75 per share.
As with all investments, penny stocks are a risk. However, if you do your due diligence and find the best penny stocks of the year, you will reap the rewards of this fantastic investing tool. Furthermore, low-priced shares allow you to diversify more than companies with large market capitalization and shares selling for over $200 apiece. To protect yourself from a particular industry receding or the nation’s economy collapsing, each penny stock investment should only account for one to two percent of your portfolio. Additionally, your total penny stock investments should only consist of about 5 to 10% of your total portfolio, depending on your financial goals.
Be guarded when choosing the best penny stocks. Many so-called gurus will blast an e-mail touting the next Bitcoin. They hold a major position of this stock and when their e-mail subscribers invest in this stock in droves, they dump the stock on the poor, unsuspecting investors. Read all disclaimers at the bottom of your e-mails from professional day traders. Invest only in companies that provide financial statements and have a history of profits. Look for these winning penny stocks on large, federally regulated stock exchanges such as NASDAQ or NYSE. They must meet all federal reporting standards. Track a potential stock for a week, looking very carefully at how a stock changes in value from Friday evening to Monday morning before jumping on it. Purchase stocks that sell for at least $0.50 a piece and at least 100,000 to 250,000 shares traded per day. Remember, past performance does not indicate future success. Be careful and invest no more than you can afford to lose. Set mental blocks for yourself, hold yourself accountable, and reap the rewards.