Apr 12, 2012

Posted by in Penny Stock | 0 Comments

Making A Profit With Dollar Stocks

What are Dollar Stocks?

Dollar stocks are small shares that sell inexpensively, although the name is somewhat misleading since not every dollar stock trades for one dollar. Generally, these stocks trade for under five dollars and have market caps at 200 million dollars or less. Their low trading price makes it easy for new investors to get into trading, although their worth fluctuates more widely compared to other types. Experienced investors may be able to get higher returns from their dollar stock investments, since they already have experience recognizing ideal margins at which to trade.

Red Flags and Dollar Stocks to Avoid

Dollar stocks can be considered high-risk or volatile stocks, since they are commonly manipulated or traded from companies that are not stable enough financially for these shares to perform well on the market. To recognize potential red flags, spend some time trading mid-cap stocks before getting into dollar stocks. The experience in reading balance sheets and cash flow statements is valuable and will translate well into recognizing smaller stocks that have the potential to perform similarly well.

Some stocks that are automatically too risky for even experienced investors include stocks that are traded over-the-counter or via bulletin boards. These stocks are not moderated by a major United States exchange and are more likely to become problematic. Additionally, stocks from companies that trade less than 10 million dollars in revenue on a yearly basis do not have enough financial stability to provide a worthy investment.

Instead of searching solely by share prices, try searching by price per share and book value per share and comparing assets to liabilities. This provides a more thorough understanding of the value of the company. Additionally, keep an eye out for companies that have a steady income flow that grows steadily and gradually. Always avoid companies that have heavy debt, since it is unlikely that they will ever grow enough to provide a return.

Recognizing the Right Margins for Dollar Stocks

Setting a specific margin at which to sell stocks makes it more likely that they will trade before the margin drops. This helps keep investment returns high and losses low. For most stocks of this type, a profit margin of 50% is reasonable and traders should not hold out for higher margins because they are unlikely and risky. Since dollar stocks move quickly, it is important to understand the risks and how to avoid losing profit on them.

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