What To Look For When Buying Shares – Penny stocks, as the name suggests, are stocks of companies that trade at low stock prices, often less than $1. With stock prices this low, there’s an understandable attraction to retail investors who dream of buying 10-cent stocks and seeing them rise to ten or more.
But before buying Inbani shares, an investor should be aware of several key factors that affect the way these shares trade and have a solid understanding of the inherent risks that follow.
What To Look For When Buying Shares
One of the biggest mistakes retail investors make is that they view penny stocks as affordable. There is a feeling that one is getting better bang for their buck when buying thousands of shares than two companies with higher share prices.
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At first glance, this line of thinking seems rational, since a $1,000 investment in Company A trading at $0.10 allows the investor to buy 10,000 shares of Company B trading at $100 rather than 10 shares. The number of shares outstanding is an important piece of information that is often overlooked.
Let us assume that Company A and Company B share the same fundamentals except for the number of shares outstanding. To simplify, let’s assume both companies have a market capitalization of $100 million.
When only the stock price is considered, a retail investor may think that the quality of a company trading at $100 is much higher than one trading at $0.10. As we saw in the example, this is not always the case because they are identical, so it is important to consider the number of shares available.
Another factor to consider when trading penny stocks is dilution. The number of shares outstanding is often out of control by using tools such as employee stock options, stock issuances to increase capital, and stock splits. If a company issues shares to raise capital, which many smaller companies do, it often dilutes the percentage of ownership of other investors.
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For example, if Company A issues an additional 110,000,000 shares in an effort to raise capital, it is natural for the stock price to drop to $0.09 (the $0.09 keeps the market capitalization constant at $100 million). In this case, the underlying business has not changed. But the number of shares causes the share price to fall.
When trading penny stocks, it’s important to find a company with a strong hold on its share structure, as constant dilution reduces the value of existing owners’ shares.
Most companies trading with share prices under a dollar have relatively small market capitalizations, but as shown above, this need not always be the case. While investing, it is important to consider the strength of the company’s fundamentals.
Does the management team rely on issuing new shares to raise capital? Is the company profitable or will it be able to make a profit based on its current business structure? Can the company compete in its industry? For those willing to do their homework, stones that meet these criteria are sure to be found.
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GGP, Inc. (GGP) As you can see from the chart, the company’s stock price fell in the penny stock range during the 2008 financial crisis. For those who don’t follow the company, GGP owned, managed, leased and redeveloped real estate such as regional malls until it was acquired by Brookfield Property Partners in 2018. Investors who keep an eye on the stock’s structure, fundamentals and competition can find GGP a prime candidate to profit from the massive upside. In subsequent years.
Another important factor to consider is that certain sectors are more common in finding stocks that trade for under a dollar. For example, the metals and mining sector is well known for the number of companies that trade pennies.
Relying on issuance of new shares to raise capital for financial operations, increased competition and aggressive incentive schemes, it is very important for investors to focus on the factors mentioned above to succeed. For those who like to do their homework, you can identify winners.
When most retail traders look at a penny stock, they ignore basic fundamentals like the number of shares outstanding. As with all investing, it’s important to examine a company’s fundamentals and overlay this information with details such as how badly the shares are dilutive, shares, stock options and issuing new shares to raise capital.
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Diluting shares affects existing shareholders and is especially common in penny stocks. Monitoring the stock composition and other fundamental factors mentioned above can help investors spot winners.
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If you are a new investor, we recommend reading this investment guide for beginners and investing in index funds or mutual funds. This will diversify your portfolio and reduce risk while learning more about the stock market.
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If you already have a good basic knowledge of investing and want to improve your stock picking acumen, read on.
Getting started with investing can seem daunting or even scary to some. But if you want to make informed decisions when buying individual stocks, you need to know how to read and understand stock charts.
In this article, I’ll break down the essentials of stock charting and explain the key things you should pay attention to. By the end of this helpful guide, words like “dividend,” “trendline,” and “support lines” won’t sound foreign.
Simply put, a stock chart is a graph that shows the price of a stock over a period of time – for example, five years. More advanced stock charts display more data, and by understanding the fundamentals you can gain more information about a stock’s historical, current and expected performance.
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Now let’s look at a typical stock chart. For the sake of this article, Yahoo! Let’s use Apple as an example stock, as shown in ! Finance.
If you don’t already know, the ticker symbol is the sequence of letters following the company name. It identifies the company in the stock market.
I’ve also taken the liberty of filtering by past 15 years, which you can easily do by changing the date range at the top of the expanded chart.
Here’s a look at Apple’s stock over the past 15 years. I bet you were invested in Apple in late 2008/early 2009!
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Now let’s get into the different pieces and parts of a stock chart so you can start reading one like a pro.
A stock chart is useful if you know how to read its information and understand what it is showing
Here are four key data points you need to understand to fully harness the power of a stock chart.
That’s the blue line you see every time you ask about stocks – it goes up or down, right? While the trendline may seem like common sense, there are a few things I’d like to call out so you can understand it in a little more detail.
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First, know that stocks take big dives and make big gains. Don’t react to big drops or big gains in a positive or negative way. You should use this part of the stock chart to see what’s going on.
In fact, the trendline will lead you to dig deeper. For example, Apple as a company really took off from 2009 to 2012.
But what happened from 2012 to 2013? The stock began to sink – at one point, shares fell more than 40%!
This is where your trendline comes in handy. News comes and goes, but when the news is accompanied by a dramatic change in the trendline, it’s something to pay attention to.
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If you see something like this happening, I urge you to find out what is going on in the company. Most strong companies can bounce back from such hits, but not all can.
First, its longtime CEO, Steve Jobs, resigned in 2011