And you also aren’t sure if penny stock trading is the right way to go.
Anytime this topic (Penny stock trading) comes on anywhere, people are usually thinking or talking about all the bad sides right away.
In all fairness, they have their reason for that given the fact that penny stock trading has proven to be a very dangerous path to earn profits.
Nonetheless, profits are there to be made and people are still making lots of them on a daily basis. At the same time, losses are big parts of penny stock trading and this fact will never change no matter what.
So, how would you know whether or not penny stock trading is for you? It’s one of the most important questions to ask yourself before you start throwing your money on this specific stock market.
First, do you even know how to define penny stock? If you don’t, you can read some more from my earlier blog post here.
Without taking too long, here’s when I think you should consider trading penny stocks.
1- When you have money to spare or can afford to lose
You should never trade penny stocks if you don’t have some backup funds. I know you may have read several articles where someone uses all his life’s saving in penny stock and becomes a millionaire thereafter.
Most of those stories are true and can be confirmed; however, something as such is one of the greatest risks one can ever take.
If you have some money sitting there that you don’t have any use for at the moment, you can use it to trade penny stocks, but if that money is all you have, I wouldn’t do that if I was in your position.
The risk of losing is always greater than winning when it comes to penny stocks. It’s not for no reason that many people refer to this market as a gamble.
2- When you understand the market
If you’ve been reading my posts you should have a very good idea as of how much of importance I give to self-education when it comes to penny stock trading.
Why would you put your hard earned money into something you don’t even understand? It would make no sense, or it would even be a foolish idea.
Don’t get me wrong, you can start trading while you have no idea what you’re doing, but you’d need an expert in this field guiding you to make the right choices.
3- When you have sufficient time on your hands
To trade penny stocks you’ll definitely have to be around and watching the movements being made in the market or your positions. Some traders will sit right in front of their computers for their entire trading period of time.
Though you may not have to do just like them, you’ll sure have to monitor your positions from time to time. Why is this an important practice?
It may help you locking your gains or stopping your losses.
All trading platforms come with many features that can enable stock investors to trade in their absences; for example, we have “Stop loss” which is a very commonly used option on all trading platforms.
A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price).
In essence, this helps traders to have an idea of where their trade will be executed while they’re not in front of their PC. However, there’s a chance of not selling or buying any shares if this set point hasn’t been reached or crossed.
4- When you’re able to check the fundamentals before you buy
This should be the number one point in your checklist. Zaw Thiha Tun, from Investopedia, couldn’t have said it any better. Investors should conduct thorough due diligence before taking chances on any penny stock.
Although you should be able to learn all the fundamentals there are to learn about penny stock trading right in the comfort of your home, with just a few number of clicks or taps. Putting what you’ve learned to practice may not be as easy for you.
That’s where paper trading or stock market games come into play. What exactly is a stock market game?
A stock market game enables you to practice with virtual money, it’s also called paper trade since you’re not using real money in your trades.
The best part of those games is that they’re trading at the real time, real stock names, and even real data. That makes it very real for a player with the exception of the virtual money.
They’re totally free, you won’t be charged a coin. Before you start trading with real money it does make sense that you practice with one of those types of games first.
Trading penny stock could be very beneficial, it can also be detrimental to one’s portfolio.
Therefore you have to be extremely cautious while you’re picking a company to invest your money into.
the best way to do that is to have a very clear understanding of this market, know what to expect, as well as knowing how to conduct your own research.
Don’t start unless you’re ready and know what you’re putting yourself into.