Penny Stocks Have High Profit Potential

AV8R | Aug 23, 2010 |

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Penny stocks, which are also referred to as micro caps, are an investment vehicle that can be very lucrative. These stocks are not expensive and can significantly increase the diversity of your portfolio since you can afford to invest in multiple penny stocks at once. Contrary to the name "penny stocks," these micro caps are actually all stocks that sell for $5 or less.

Penny stocks can be a truly great investment vehicle because you can purchase a very inexpensive stock and then realize a large return if the stock price only moves a small amount. As an example, if you purchase a penny stock for $0.30 per share and something happens in the market to cause its price to increase to $0.90, you've just tripled your money! It's not the same for more expensive stocks. A $0.60 increase in a stock that's currently valued at $50.00 per share isn't much of an increase. The lower a stock's value, the higher the return on a small price movement. Price movements such as these happen all the time with penny stocks.

Finding a penny stock that is in a rolling stock pattern is one of the easiest ways to trade these securities. A rolling stock pattern just means that the penny stock is stuck in a range between two prices. The stock will typically increase in price for a period of time until it reaches the high point of its range and then it will reverse course until it reaches the low point of its range. Identifying a stock that's in a range is very easy to do just by looking at its stock chart. Once you're identified a penny stock that's in a range, you just buy it when it's trading at a low point and hold it until it reaches its high point. This is a very easy technique to profit with. Trading a stock that is range-bound can be done over and over again for repeat profits.

Even though you can trade a penny stock over and over again for repeat profits, you should be aware of some potential pitfalls of these types of stocks. First, penny stocks are usually cheap for a good reason. Penny stocks are often comprised of companies that are either new to being publicly traded or they are stocks that have been around for awhile that have lost value for some reason. You will want to always take the time to look into a company's history before buying it to see whether it has a negative history that has driven down the price. Find out as much as you can about the company, its products, its history and what the company's future outlook is.

Trading volume is another thing that you should closely examine. If there is insufficient trading volume, you might have a hard time selling the stock when it comes time to sell. If there is enough volume, however, selling the stock is usually no problem.

Exciting and profitable are words that are often used to describe penny stocks. Before you start your micro cap trading journey, definitely take the time to do your homework.