Understanding Penny Shares and How you Can Make Money with Them

The last few years have seen a skyrocketing in the popularity in penny stocks and shares trading. Savvy investors who are not aversive to risk continue to make profits with this trading. How? It starts with gaining a full understanding of the trading, including the best penny shares to buy UK.

About Penny Stocks

You will get different definitions for penny stocks depending on whom you ask. That these are shares priced at a penny is a matter of debate and not usually the case. What everyone can agree on is that penny stocks can have great potential gains for someone who understands the game. If the trade works out, you are looking at a nice return, from a small investment, which is really everything any investor could hope for.

Penny Stocks for Beginners

Penny stocks are a popular pick for beginner investors. If you are looking to get started, the first thing to do is to understand how to invest in penny stocks. This should cover the basics of penny stocks including how to identify  the best penny shares UK, understanding the risks, and opening a trading account. 

Here are some of the top tips to help you increase your chances of success when trading penny shares

1. Look at the Company Balance Sheet Before Investing

The most important thing to consider when choosing the best penny shares to buy UK, is of course, the financial strength of the companies. This cuts across the board, whether you are looking to invest £ 5, or £ 50000. 

On matters financial strength, consider the company’s debt profile. You can consider it a safe bet investing in a company with a long-term debt that is no more than 50% of its shareholder equity. The lower the debt, the better and safer the company is as a bet.

2. Know Your Investment

It is not enough to understand the best penny shares to buy UK, based on their financial strength and profitability. As you would with any equity business, take the time to understand what it is that the company you have invested in does.

 If it’s too hard for you to understand, then you may want to stay clear of it.  With penny shares, you want to stick with what you know.

3. Diversify your Investments

Penny shares come with a high risk/reward ratio, which is why you will want to diversify your portfolio. Invest heavily in research and come up with a list of the best penny shares to buy UK. 

Instead of a concentrated portfolio, go ahead and spread your bets over tens of stock, or even more. The most important thing, as mentioned, is to ensure that you do your research, ensuring that every stock you invest in has a high earning potential. Again, you are always safer spreading the risk with smaller investments in different penny shares, as opposed to putting it all in one or two stock options.

4. Size Your Positions

It cannot be said enough;  be careful not to trade big. Because of the higher risk profile of penny shares, avoid trading large positions as much as possible. You need to be very careful with position sizing for several reasons. In addition to limiting your risk, keep in mind that the smaller your position, the easier it will be for you to get out of the stock should it come to that.

5. Sell Quick

Pick the best penny shares to buy UK, and you may be able to make upwards of 20% in returns in a matter of days. If your options are well vetted and such returns are a reality for you, then, by all means, sell quickly. 

Some penny stocks may just be getting pumped up. Its therefore important that you take any profits you can make, as soon as possible and move on. You don’t want to get too greedy, and increase your positions expecting a larger return, only for things to go in the opposite direction.

6. Don’t Sell Short

Shorting pumped-up penny shares may seem like an attractive idea, but it really is not, and you need to think twice when the thought come to mind.

The reality of the high volatility of penny stock is not lost on anyone.  If you are on the wrong side of  the trade, you may be staring at a very significant loss.  Again, you may have trouble finding penny shares to short, especially if you are only working with newsletter tips and the hype going around. You can never be too sure, which is why it is best not to short penny stocks, unless of course, you are a pro.

Penny stocks continue to feature among the top investments to become rich fast. There is risk, and there is reward. It comes down to research, and applying the best tips for success as highlighted.