Is Investing in Penny Stocks Really Worth Your Time and Effort?

A penny stock reflects to any stock that trades for less than $ 5 per unit. As you probably already know, a stock allows you to buy into the ownership of a company or business. Penny stocks are generally traded over the counter, and not via a stock exchange, and due to their low cost price they are often a source of attraction to a new investor with a limited budget.

These stocks can be a lucrative source of profit for you as an investor, if you are careful to invest in the right business, and are easier to begin trading with because of their low prices. However, they are also considered to have a high liquidity risk. This reflects to the fact that the stocks may not be easy to sell off for a profit once you have acquired them.

The liquidity of a stock is generally the ease with which it can be purchased and sold within the stock market. So for penny stocks, sometimes investors find that they are unable to trade them off for a profit and often have to lower their sale price and accordingly make a loss. This is an aspect of trading in these stocks that you will want to be cautious about.

One way to filter out the stocks that represent a high liquidity risk is to research their daily trading volumes. Those that have consistently maintained a high trading volume will generally be more liquid, which is exactly what you want.

When considering investing in penny stocks, you may find them a little bit more difficult to locate than regular stocks. This is because they are not traded on the stock exchange and therefore will not have their information listed by the Securities and Exchange Commission. There are other methods by which you can find them, however. Specifically, you should be looking for high-volume stocks which have a lower liquidity risk.

How to Locate High-Volume Penny Stocks

The easiest place to begin your research will typically be on the internet. Firstly, you will want to visit investment research sites, which offer a stock screener tool. What this tool does is that it allows you to find specific stocks based on a set of criteria that you decide.

Since this is a search for penny stocks, your basic criteria here will be stocks with prices between $ 0 and $ 5 per unit. Once you have all the stocks with this criteria listed, you will want to go on to the other important criteria in this search, which is the amount of trading volume.

You can go on to find those of high volume by fixing a value of 1 million in the stock screener's volume field. Make sure your search is for the volume that the stock has had on its most recent day of trading. This will return a result showing all the stocks that have traded 1 million units and more on their last trading day. It will be a pretty basic, but promising judge of the liquidity of the said stocks.

Also remember to check the trading history of the stocks that you wish to trade in, to make sure that they have traded high volumes consistently and are not just displaying a short-term divergence. This will further confirm their liquidity and potential profitability.

Source by Stuart C Jarrett