Most investors want to buy penny stocks at a discount; therefore, finding a cheap one is one of the most common techniques. In this article, we will be going into detail on how to find penny stocks before they explode.
These Are The Main Points In This Article
What are penny stocks?
A penny stock is a stock that trades for less than $5 a share on major exchanges. Penny stocks are shares of stock that trade for less than $5 a share. With shares priced under $5, Penny stocks have a higher level of volatility, but they also offer bigger profit potential.
To be honest, learning how to find penny stocks before they explode is an art. Why? If it were that easy, everyone would walk the street as millionaires and smile at their banks.
Some penny stocks are traded on larger stock exchanges such as the NASDAQ or the NYSE. However, many of them trade on over-the-counter (OTC) markets. OTC exchanges are not subject to the same strict requirements as larger exchanges. While this makes it easier for a small business to get listed, it also increases the risk of fraudulent conduct.
Mastering the fundamentals of stock research is the most effective and challenging way to learn how to find penny stocks before they explode. Before buying penny stocks, professional stock traders utilize a variety of methods to qualify individual shares.
That is one of the factors that deter many investors from investing in penny stocks. However, as you will soon discover, there are still possibilities to profit from penny stock price increases. And, no, you are not required to trust the firms.
What you should know
- Penny stocks are firms whose stock values are frequently less than one dollar.
- Because major stock exchanges, such as the NYSE and NASDAQ, have listing requirements that must be satisfied, including a minimum share price, penny stocks frequently trade outside the major market exchanges.
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How do beginners invest in penny stocks?
Before diving into more core specifics on how to find penny stocks before they explode, let’s take care of this detail.
Penny stocks are often the first natural stop for many new investors. As the name implies, Penny stocks trade with a cheap share price, generally less than $1.
It’s easy to see why beginners get sucked in by the idea of investing in a firm for a few cents and then selling for a tidy profit when the price rises into the multi-dollar range.
Because of the incredibly cheap pricing, an investor may hold thousands of shares for a relatively little amount of cash. With that size, a few pennies per share gain may result in large percentage profits.
Advantage of Trading Penny Stocks
Penny stocks are a big part of life for some traders. But, in the grand scheme of things, they fly beneath the radar.
You must understand this to learn how to locate penny stocks to trade. That is one of their most significant advantages, but it is not without danger.
Let’s start with the nice things. Trading large-cap equities, often known as penny stocks, pits you against hedge funds, banks, and multibillion-dollar corporations. You’re not going to be able to outwit them, no matter how hard you try.
Trading penny stocks usually pits you against novice retail investors. Even a simple trading strategy may put you ahead of the competition.
Drawdowns of trading penny stocks
Without discussing risk, a talk about how to find penny stocks before they explode would be incomplete. The same volatility and rapid movement that might help you develop a penny stock account quickly can also destroy it quickly if transactions go against you.
It is critical to recognize the dangers involved. Because most institutional investors, such as mutual funds, index funds, and money managers, are prohibited by law from trading penny stocks, these securities are typically unpopular among investors. As a result, liquidity is a major problem.
Note: Penny stocks are not recommended for long-term investment. The nature of these small and occasionally shady enterprises dictates that most penny stocks will eventually collapse.
They can, however, make some significant moves before finally failing. You can take advantage of those changes in the near term if you’re ready. As a result, most penny stock traders concentrate on short-term movements, entering and leaving positions fast.
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How to find penny stocks before they explode?
How high can a penny stock go? Investor research and due diligence are essential since penny stocks are volatile, and firms who offer penny stocks typically do not file with the SEC.
It’s also common advice to concentrate on penny stocks that are traded on a big exchange. While a few penny stocks list on trading platforms such as the NASDAQ or NYSE, the vast majority do not. Various penny stocks are traded on the over the counter market.
When equities are not listed on a major exchange such as the NASDAQ or NYSE, they trade on the OTC market. Smaller businesses generally trade on this exchange when they cannot fulfil the listing requirements of a larger exchange, such as having a particular number of publicly traded shares and a predetermined price per share. If you wonder “how to find penny stocks before they explode”, now is the hour of discovery.
1. You can set Up a Stock Scanner
Every day, lots of penny stocks are traded in the United States. You’ll have to filter it down in some way. You’ll need to know where to look for high-potential penny stocks. That’s when your stock scanner comes in handy.
You may rapidly search the full universe of penny stocks with the correct scanner to find the parameters that suit your trading strategy.
Note: Stock screeners are most likely your best choice for narrowing down the universe of stocks to locate one that fits your trading style and risk tolerance.
You’ll create your criteria for weeding out stocks over time. Volatility surges, news articles, higher volume, and prior large moves are some of the things traders watch for.
2. Take advantage of chart patterns
Next on our list of strategies on how to find penny stocks before they explode, chart patterns.
Chart patterns may aid in the development of a trading strategy so that you’re prepared to take advantage of an entry point if and when the stock fulfils your expectations. It’s time to get down to business when you’ve limited down the various stock options to a small, manageable list.
Now it’s up to you to identify the deals with the lowest risk and the most potential profit. On the chart, price and volume patterns might provide information about a stock’s current state. As you get more proficient at reading charts, you’ll begin to see how traders respond to enthusiasm, greed, and critical levels.
3. Have a good arsenal of indicators
Every trader has a set of indicators that they prefer to use. Examine as many as you can to see which ones will work best for you. The majority of traders will begin by studying chart patterns. However, to establish a stronger argument for a trade, it’s a good idea to utilize technical indicators to make sense of the chart.
4. Carry out your research
Laziness is a major reason why most penny stock traders fail. They refuse to conduct the research that my students are taught to conduct. They want someone to tell them what to do, but I don’t educate them in this manner. I’m not going to offer you any fish. I’d want to show you how to fish. You’ll be able to discover how to find penny stocks on your own this way.
You may be aware that a certain penny stock has previously risen in response to the news. You’re fairly certain it’ll surge, so you buy a large number of shares. Hard effort and determination are required for success. It necessitates the capacity to accomplish what others will not. Planning isn’t enjoyable, but it’s important.
5. Keep an eye out for breakouts and rallies
It is common knowledge that stocks tend to consolidate before going for an extensive rally.
I search for stocks that have the potential to break out to new highs, particularly those that are still up on the day and have morning highs.
There’s always the possibility of a short squeeze into the close if you see a play like this on a Friday afternoon and the stock is still holding its morning high.
Short squeezes are a strategy that all penny stock traders should be aware of. When prospective breakouts hit new highs, they may struggle to keep their price above the previous resistance level.
6. Pay attention to basic price action
The true narrative about a stock is revealed by price movement. All of the news outlets in the world will not tell you when these events occur, but a stock chart will. Price fluctuations may be informative, believe it or not.
It may appear tedious at first, but you will begin to notice patterns that you would not have noticed otherwise. Which direction do you believe the stock price will go next? When you’re certain of your abilities, begin betting modest amounts of money on your forecasts.
Other ways to pick penny stocks
Two major strategies come to mind. They include:
One of the most significant and necessary strategies for evaluating companies’ critical financial data, market scenarios, political and economic trends, and many other variables. The revenue and earnings of a firm and its growth tendencies throughout time may give a lot of information about its performance.
This type of research allows investors to compare stock prices and trading volumes over time to see how a specific stock compares to its peers. It’s important to remember to invest within your limits and stick to your investment strategy regarding penny stocks.
To avoid falling victim to penny stock scammers and to build your own personal penny stock success stories, disregard any supposedly hot penny stock choices offered to you by e-mail or based on recommendations from friends.
How to find penny stocks before they explode: Conclusion
This wraps up our article on how to find penny stocks before they explode. Most retail traders neglect underlying factors like the number of shares outstanding when examining a penny stock.
As with any investment, it’s essential to assess a company’s fundamentals and overlay this data with specifics, such as how diluted a company’s shares are due to stock splits, stock options, and new shares to create cash.
These are often small-cap equities that are prone to high volatility. Investors can identify winners by keeping an eye on the share structure and the other fundamental criteria outlined above.