3 Types of Penny Stocks That Are Worth Trading

The U.S. Securities and Exchange Commission defines a penny stock as any stock that trades below $5 a share. While savvy investors use penny stocks’ low prices to make money, many people are tempted to buy them without doing their research, but this is a mistake.

Trading in stock market

Before investing in penny stocks, take time to learn about the risks involved and the key factors affecting their prices. By doing your research and learning about the types of penny stocks worth trading, it’s entirely possible, though not guaranteed, to get a good return on your investment.

Here are 3 types of penny stocks worth investing in.

1. Companies With Strong Fundamentals

When deciding whether or not to buy a penny stock, research the company first. Start by doing a quick web search. If it’s hard to find information about the company you’re considering investing in, forget about it and move on to another stock. If adequate information is available, see if the company is profitable or if you think it’ll soon become profitable based on its current business structure. Check to see if the company is competitive in its sector, and look for healthy and consistent growth in earnings.

With penny stocks, healthy growth often outweighs a poor profit margin since many penny stock companies are young. Profit, earnings, growth, and other business fundamentals are complex topics. If you’re having trouble and asking yourself, “How do I trade stocks and actually make money?” consider hiring a mentor. An experienced mentor can explain information in terms you can understand and help you pick the best stocks to trade, giving you a better chance of getting a positive return on your investments.

2. High Volatility Penny Stocks

Always check a penny stock’s volatility. Volatility is the change in price a stock experiences over a given period of time. If the price is stable, the stock has low volatility. If the price is erratic, it has high volatility. With penny stocks, you want to see stock prices that are moving quickly in an upward trajectory, experiencing higher levels of volatility. Penny stocks with low volatility have few buyers and sellers, preventing you from taking a large position and potentially making it difficult to get rid of your shares.

3. High Volume Trades

Volume is the number of shares trading on any given day, and it’s an important indicator to consider when deciding what penny stocks to buy. Low volume means the interest in the stock is low, and you should stay away. High volume means interest is high, and you should consider buying. Look for stocks trading at least 200,000 shares a day. If you’re risk-averse, you may want to only look at penny stocks trading at least 500,000 shares a day, but these are sometimes difficult to find.

Conclusion

While solid penny stocks aren’t always easy to find, they’re out there. Those willing to do thorough research have a good chance of reaping financial rewards from their hard work and patience. Consider hiring a mentor, and study the key indicators of a healthy stock before buying. If a stock has high volatility, high volume, and the company’s fundamentals are strong, think about making an investment.

Cover photo credit: cafecredit / Flickr

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