What Are Sub-Penny Stocks?
Many people, who are not too familiar with the world of stock trading, are unaware of the different kinds of trading stocks available. So people often wonder about what are sub-penny stocks, when they come across the term for the first time. This type are those stocks that are traded between the price range of $0.0001 and $1.00. These stocks are generally traded over the counter or by use of quotation services including OTC Bulletin Board and Pink Sheets.
As per records, sub-penny stocks trading can run into millions of dollars during the course of the day. These generally come across as attractive trading options for new investors who are drawn in by the extremely low price of the stocks and perceive them to be a means of gaining rapid profit, in case they gain quick value in the market. However what many investors are not aware of is the fact that these cheap stocks can cause much loss for them in the long term.
Even though many people feel that stock trading is a very easy way of making profits, it is in fact much more complicated than it seems. People not only need to be well informed about various trading stocks and the various factors that affect their market value, they also need to be fully updated about the risks involved and the market fluctuations that can help in causing the downfall or rise of a particular stock. This is especially true for people who deal in sub-penny stocks.
Cheap stocks like sub-penny stocks, might seem quite alluring but they are quite risky as compared to high trading stocks. There is no chance of recovering the money once an investor faces a downfall in these stocks. Moreover, there are numerous scams involved with trading of cheap stocks as they are quite often promoted to enhance various illegitimate pump and dump schemes in the stock market.
So to be on the safer side, it is always advisable to do trading in high trading stocks. Even if a downfall occurs in such stocks, there is always a possibility that the stocks will reach back to its highest point thus enabling stable investors to recover their money as well as earn a good profit. Even though sub-penny stocks provide instant profit, it is only short term and also involves much risk, making it best avoidable for stable investors.
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Hot Penny Stock Pick – How to Pick Great Stocks
Buy Companies You Like
Legendary fund manager Peter Lynch (managed Fidelity Magellan Fund) says to look for companies you like to do business with. If you like to eat at Mcdonalds, buy Mcdonalds stock. If you like to buy furniture from R.C. Willey, buy R.C. Willey stock. This approach will help steer you clear of bad companies. However, if it was this easy and simple Peter Lynch wouldn't be a legendary fund manager. There are many more details to consider.
Pick the right sector
A sector is a portion of the economy. For example, energy, retail, and computers are sectors. Right now there is a lot of fallout in the financial sector due to subprime loans. There are many economic factors that can downgrade an entire sector. First, follow sectors to see what types of companies are doing well. Then, pick the #1 company in the sector. Pick the market leader.
In the last few years, the international sector has done extremely well due to the declining dollar value. The reason for this is because when you own a foreign investment, you're actually holding the stock in the foreign currency that was purchased with U.S. dollars. While the dollar drops in value relative to that currency, when you sell your investment it converts back to more U.S. dollars.
In any market sector, buy the #1 company
Most industries have 2-3 major players. It's actually amazing how universally true it is. The other fact is that the #1 company does far more business than #2 or #3. In addition, #3 usually gets a tiny trickle of business, in comparison. For example, market leader Dell Computers has a much better return than Gateway Computers. You will find this true for nearly all companies.
The fact is that the #1 company of a sector will outperform, on average, the other stocks by a mile. If you invest in any market leader, early on, you actually have a great chance to become a millionaire.
Avoid Small Cap Stocks
It is important to note smaller companies can give you much better returns than big companies. If you can successfully pick and time small companies, you will have the best returns of all. Many people try to pick obscure companies in hopes of gigantic returns. What you have to remember is that professionals that spend their whole life analyzing stocks can't pick these companies correctly. Statistically, you have less chance of success. This is why you can get a better return (more risk, more reward). If you think you can pick them, you are misleading yourself. You may want to consider a small cap mutual fund or emerging market fund instead.
Look At Management
Check to see if you like the management. Managers can make or break a company. Follow managers that care about return on equity. Some managers spend fortunes on frivolous items. Good managers make sure they can get the best rate of return on the equity they invest. If you follow managements spending, it will tell a lot about the company.
Margin Of Safety
The company must have enough cash reserves to cover a 20% loss (minimum). A lot of companies are in a position that everything must go almost perfect for them to make it.
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