Penny stocks sell you a dream! A dream of turning a few dollars investment into a million dollars.

This is why many investors get lured into investing in these stocks. But, having said that, there is nothing wrong with investing in penny stocks because there have been many instances where a few dollars have actually turned into millions of dollars. However, making this dream a reality requires a lot of hard work. For starters, you need to find a stock that is worth investing in. Therefore, let us look at the factors that impact penny stocks and find out which stocks are worth investing in. 

Understand the Platforms Where Penny Stocks are Traded

Penny stocks are generally priced under $1 and don’t oblige to any listing requirements. This list of oil penny stocks under 10 cents is a great starting point if you don’t know where to start.

Determine their Share Price

One of the mistakes investors make is that they view penny stocks as cheap. For instance, the share of a particular company is priced at $0.10. Now, if an investor invests $100 in the company, they are buying 1000 shares of that company. 

Now imagine the same investor investing $100 in a company whose shares are priced at $25. In this case, they are buying only four shares. One key thing that most investors overlook in this scenario is the number of outstanding shares. 

When a trader invests in shares, they often think that the quality of shares of a company trading at $25 is much higher than the one trading at $ 0.10. However, most of the time, they forget to count the number of outstanding shares that play a huge role in investment. 

Beware of Share Dilution

When trading in penny stocks, you also need to be careful about stock dilution. When a small company issues shares to raise its capital, it dilutes the ownership percentage of the shares held by other investors. 

For example, a company issued 10000 shares to raise capital, which will result in the prices of shares declining. Therefore, when investing in penny stocks, it is crucial to understand whether the company has a firm grasp on its share structure because consistent dilution of shares can lead to a decrease in the share prices held by existing owners. 

Identifying a Good Stock

To spot a winning stock, you have to do your homework and find out the answers to the following questions:

• Does the company rely on issuing new shares to raise capital?

• Is the company profitable, or will it become profitable based on the current business structure?

• Can the company compete in a particular sector?

Avoiding Penny Stock Scams

As an investor, you must know that penny stocks are most susceptible to fraud, and to identify if a particular stock is genuine or a scam, you must look for the following red flags:

• Identify if stock is overly promoted, which feels “too good to be true.”

• Vaguely labeled newsletters or promotions by so-called “ stock gurus” are red flags. 

The following are some of the most popular scams that occur in penny stocks:

Pump and dump scam: In this scam, scamsters try to falsely inflate the prices of a stock and subsequently try to offload it for high profit. This, consequently, leads to difficulty in selling off the shares.

Short and distort: Promoters sell high-cost stocks and then try to defame the stock, leading to a fall in the prices. Then, they square off their position for high profit. 

Long-term averaging techniques: In this scam, investors are advised to buy penny stock every time the prices dip, with a promise of windfall profit once the prices start rising. 

Conclusion

Finding penny stocks that will make your trading dream become a reality requires a lot of dedication, hard work, and patience. However, if you strategically invest in these stocks after you have considered all the factors mentioned above, you will surely be living your dream. So, start researching today and beware of the scams to become a pro trader. 

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