The beginning of another year means evaluating various financial goals, including the investments you plan to make. For many people, penny stocks are appealing opportunities to grow their money. You might have heard about penny stock trades, or maybe are now coming across the term. They refer to stocks priced at less than $5. Due to their low prices, penny stocks attract a lot of buyers. What some investors fail to realize is that not all cheap stocks are worth spending money on. So, before shopping for the best penny stocks for 2022, consider a few things.

Can You Make Money

A common question when investing in any instrument is if it can bring in good returns. Any type of stock can generate a profit, it’s only a matter of selecting the right one. You can find penny stocks with promising potential, regardless of the price. In the same way, large corporations have their benefits as investment alternatives, so do small companies. Most of the notable enterprises you see out there started from somewhere. In some instances, penny stocks are a chance to get in on fast-growing in the early stages.

How to Pick Winners

So, how can you tell if a penny stock is a valuable investment? Most penny stock companies have small market capitalizations, but some exceptions exist. You can find an enterprise with a solid foundation and excellent growth potential. Thus, look at more than the share price when evaluating penny stocks.

Consider a company’s business structure. Is it a sound one? Find out how the management team raises capital. A reliable enterprise should not rely only on its share sales to source funds. Another element to examine is its ability to compete in the market. How does the company hold up against the competition? It might take considerable research, but you can find profitable penny stock trades that are suitable for parking your money.

Associated Risks

As with any investment, penny stocks have their downsides, which you must be aware of beforehand. Penny stocks are mostly from small, unknown companies. Unlike blue-chip stocks, which belong to financially sound and reputable businesses, penny stocks have riskier securities. A penny stock enterprise is unproven, meaning you can’t tell if it is capable of surviving economic downturns. Therefore, any investment you make is solely on faith.

Even though several penny stocks trade on the NYSE and other major exchanges, a majority operate over the counter (OTC) via the OTC Bulletin Board. OTC transactions are not subject to rigorous regulations like those imposed on large stock exchanges. Hence, as an investor, you don’t get a lot of assurances.

Tips for Investing in Penny Stocks

As with any investment, you must be careful when trading penny stocks. For one, don’t pay too much attention to the advice you get out there. Set aside time to conduct your research. Watch out for investors who might be looking to offload worthless shares.

Note that public information on some penny stocks is severely limited. Companies might also be cagey about releasing performance details. For this reason, be cautious of your information sources because not all of them might be credible.

Avoid over-investing, regardless of how attractive the stocks are. The ground rule with high-risk stocks is to spend money you can afford to lose. So, don’t put in more than 10% of your whole portfolio.

The low price of penny stocks can be incredibly tempting. Therefore, it makes sense for some investors to consider these companies, especially when looking to spread their risk. Finding suitable stocks to trade is not easy, though, especially for novices. Never forget to consider a company’s underlying factors like the number of outstanding shares when comparing investment options.