Penny stock is a stock that trades at a relatively low price and market cap.
Penny stocks are generally attractive to retail investors who want to make a quick buck. A 10 cent increase on a stock worth $1 is equivalent to 10% returns. A 10 cent increase on a stock worth $10 is equivalent to only 1% returns. A small increment in a penny stock can yield high returns. This makes it really attractive to many investors. However even a 10 cent drop can reduce retail investors investment drastically. Therefore penny stocks should be traded with caution.
It is alrite to buy penny stocks at low prices and then eventually sell it off at high prices, provided you thoroughly understand the company’s business model and financial statements. It is advisable to diversify your penny stock portfolio to spread your money.
4 Reasons To Sell Your Penny Stock
There will be times when you might want to sell your stock for only a small profit or no profit at all. Bad news of almost any sort can drive a stocks price down very quickly. This is why it’s important to follow your stocks very closely. Lets find out some reasons you should sell off your position in penny stocks.
Reverse Stock Split: If the company announces a reverse stock split, experts suggest that you get out and sit on the sidelines awhile before considering getting back in. Many companies do this to raise the price of the stock. They issue fewer shares that are worth more money per share, but the price usually falls.
Equity Offering: Another thing to be on the lookout for is the possibility of a company raising cash through an equity offering. If the company needs more working capital it will issue more shares to sell to the public. This will dilute the share value and most times the stock price falls.
Increased Inventory: If the company starts showing large increases of it’s product inventory you should start thinking about selling your shares. This is a sure sign of coming trouble. When sales are down inventories go up. Big inventories also create additional expenses for the company.
Bad Merger: If you find out that another company has made an offer to buy your company’s stock at a lower price then get out. The company that made the offer must think that the lower price is the true value. If your company accepts then they must also think that it’s only worth that much. Get out.