How to Choose Penny Stocks?

Have you been advised to invest in penny stocks? Heard about it through your colleagues while they discussed their trading strategy, but not quite sure what it is? 

Penny stocks are traded at a low price and low volume at the exchange. Such stocks mostly belong to newly-found companies or companies that have low capitalization. As the share prices of such companies tend to be low due to their scale and market position, they tend to make for attractive avenues of investment

However, one must understand that getting penny stocks is a high-risk investment for the same reason. While trading stocks in this category, one needs to be vigilant and trade carefully. To trade in these stocks in the Indian stock market, you need to do so through a registered stock broker.

Trading in penny stocks may not be wise for all those who want to play safe and are risk-averse. But, if you’re going to play the stock market in India and identify stocks that fall in the category of penny stocks, these trading tips can help reduce the risk factor and help you make wise investment calls. 

The first and foremost aspect of trading in penny stocks is knowing the company’s stocks you are investing in. Their authenticity, financial soundness, growth prospects, market standing, etc., should be monitored regularly to identify the company’s strengths. 

Once done right, this investment avenue can become lucrative for an investor. But as an investor you should not only dependant on penny stocks, rather you should park a small percentage of your portfolio into penny stocks. May be less than 5%.  It is always better to start with low exposure and then look for trading tips to identify the correct levels to book profits and cover positions. As the share prices of penny stocks are pretty low, a small investment can fetch a good volume of shares.

The choice of shares in penny stocks should be based on your faith in the company and its prospects. If the company’s fundamentals are strong, the chances are that it’s here to stay, and your investment is safe. Another thing that can be useful while picking penny shares is to diversify investments in different industries or sectors. The diversification in the selection will help spread the risk and result in a better and more powerful penny stock portfolio.

A crucial lesson to remember is that tracking the company’s health is essential for investment in penny stocks. Even after the investment is made, one must monitor the company’s business to identify any inconsistency or performance lapses. It is essential to minimize losses and exit at the right time if the stock is showing signs of crashing.

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