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How to Invest in ASX Penny Stocks in 2023
The stock market is becoming denser and more advanced with every day that passes.
It seems that someone is always cooking up some new contract, establishing a new corporation, or innovating in some other way to make the market more difficult to access.
Like all markets, the ASX has a great starting point for even the most unaware trader entering the market for the first time: Penny stocks.
Table of Contents:
- What are Penny Stocks
- The Market Definition of Penny Stocks
- Examples of Penny Stocks
- Pros and Cons of Penny Stocks
- How do you Invest in Penny Stocks in the ASX
- How to Pick a Penny Stock
- Buying Penny Stocks, Summarized
- Concluding Tips on Investing in ASX Penny Stocks
What are Penny Stocks? 🤔️
Penny stocks are stocks that cost extremely little money to buy and can be traded for similarly small amounts of money as well.
If you hear that description and think, “Wow, they must be worthless.” Then you are half right. They are stocks designed to enable extremely low risk and low reward trading.
In the context of trading, a stock not being worth much is not a problem if you did not have to spend much to buy it.
If a stock is worthless and you paid a penny for it, then while the stock might not valuable then at least you have it on record that you can be trusted to complete a transaction.
Now, imagine if you used that trust to sell that stock you bought for a penny and got two pennies for selling it. You doubled your money!
The Market Definition of Penny Stocks 📖️
Everything above is the definition of penny stocks as you, the consumer, are going to understand them.
But penny stocks are actually a properly recognized and categorized form of stock, for which the ASX has a specific definition and list of criteria.
While you can usually tell a penny stock when you see one, here are the features of a penny stock as the ASX recognizes them:
- They are stocks of a small company
- The company has only recently been listed
- The shares of that company are valued below $5
- The market cap is below $50 million
- Investing in the company does not pay dividends
- The track record of the company is limited
And, in case you were wondering, a stock does not have to check every single one of these in order to be considered a penny stock.
It is up to the buyers and sellers of the stock to determine whether or not a stock is or is not a penny stock, and if there is a disagreement, then a judge will be the one who decides.
Examples of Penny Stocks
- Ardent Leisure Group – Last Closed at $1.27
- Cardno Ltd. – Last Closed at 1.70
- Dacian Gold – Last Closed at 0.20
- Eclipx Group – Last Closed at 2.07
- FAR Ltd. – Last Closed 0.34
Pros and Cons of Penny Stocks
- Penny stocks are cheap. That’s the first thing you’ll learn about them, and the first thing you will notice when you try to sell them.
- Buying penny stocks builds trust. Trust is important in the marketplace, as it allows you to sell things for higher than they are worth and buy them for lower than they are worth.
- Good for beginners. Most people are not going to strike it rich with a random investment on the stock market, and penny stocks teach you how to make steady money through frequent trades.
- Volatile. A penny stock is just as likely to double in price as it is to half in price.
- Low value. This is a great reason to buy them, but it means you will have trouble selling them.
- Hard to trade in other methods. You are unlikely to find options or CFDs of penny stocks.
How do you Invest in Penny Stocks in the ASX? ➡️
The two ways that most people invest in penny stocks is by hiring a broker or using a trading app.
The advantage of hiring a broker is that they know what they are doing. You can trust them to implement a trading strategy. That does not always mean they will make money though.
The advantage of using an online trading platform or app is that it does not cost a commission like a broker does. You can trade exactly how you want to trade, though be careful about your strategy.
Hiring a Professional to Invest in Penny Stocks
To begin with, a professional that invests in stocks on behalf of a client is called a “broker”.
The process behind a stockbroker’s business is that people will give them an amount of money to invest in the market. They can also give the broker some guidelines on what kind of stocks they want them to buy.
In this case, you will want to tell them to invest in penny stocks.
Pay Attention to Their Contract
The broker will then charge you a fee for doing business with them at all, and then establish a contract that should include two things:
- The amount of money they are getting and how long they have to use it.
- How much money they are going to get afterwards. This amount will usually depend on how much they make.
In addition to those two things, be sure to give instructions in the contract for what kind of stocks they are supposed to invest in. If you want them to invest in penny stocks, say so.
If they lose all your money investing in something you told them to not invest in, then you can dispute parts of the contract.
Of course, if the stockbroker tells you that they are not specialized in penny stocks, or that penny stocks are not good to invest in, or that the penny stocks available cannot be expected to yield good returns, then listen to them.
Penny stocks are a great way of making small amounts of money, but many brokers are looking to invest in more stable stocks. After all, remember the volatility of penny stocks.
Consider Hiring Multiple Brokers
If you do 100 trades an hour that all make you one penny, that is $1 an hour of profit.
But if have 10 brokers making 1000 trades an hour total, then that is $10 an hour in profit.
That is more than minimum wage to begin with. Of course, you have to have some form of income to pay the brokers for their time so that it is worth it to them.
But that $10 is passive income that goes to you for no time.
Investing in Penny Stocks Yourself
The other way to invest in penny stocks is by finding an online trading platform and investing in them yourself. You need to make an account in order to use them, usually with a verified identity.
Some platforms only require verification through deposits. That means you cannot buy or sell anything until you deposit a certain amount of money into your account.
Pay close attention to what it takes to be able to both buy and sell with an online platform.
How to Pick a Penny Stock ➡️
Penny stocks are volatile, but volatility does not mean complete chaos. In a situation of complete chaos, the value of the penny stock will increase and decrease for seemingly no reason.
In the case of volatility, all that means is that it will increase and decrease due to very little stimulus from the market.
What that means is that while it can be hard to predict the changes in a penny stock’s value, it is still not impossible.
So, here are the two big things that usually influence the value of a penny stock.
1. Is it in a “Growth Market”?
A growth market is not easily identified, but it is easily defined.
For a business to be in a growth market, it must be doing business in a market that one can reasonably expect to grow the business in the next 10 to 15 years.
For instance, electronics is a growth market since electronics seem to only become more and more prevalent and important to human society.
Therefore, a penny stock in electronics can be more reliably expected to grow than a penny stock in something that is not a growth market.
If you are going to look for penny stocks, start in growth industries where independent businesses are prevalent.
This is part of the reason why tech startups are a favored shell company among the superrich: Elevate a tech startup with a fresh idea with some investments, make it look like the next big thing, and then sell the moment you think they are not going to take off.
Of course, you can always keep your holdings in that company if their idea does take off and sell for even more later. But tech startups are good because the tech industry is such a booming industry that you can make a lot of money very quickly off of a truly low-effort startup.
2. Is it Trading in More Than Stocks?
Stock trading is grand and all, but it is just one method by which a company can do business. It is certainly the most obvious method, but there are tons of other things a company can do with its stocks that can make it grow for seemingly no reason to the untrained eye.
3. Stick to Your Strategy
There are two types of strategies: Growth strategies for making money over time, and income strategies for making money quickly. You cannot use the same investments to do both.
More importantly, you cannot switch from one to another. Know what you are doing and stick to it.
Buying Penny Stocks, Summarized
Here are the steps you need to take to buy penny stocks off of the Australian Securities Exchange:
- Open a brokerage account on an online platform
- Decide on an investment strategy—either a one-year income strategy or a two-year growth strategy
- Research your industry and find the businesses that are trading in penny stocks
- Buy your stocks and be ready to implement your strategy
- Either sell the whole stock, small dividends, or hold the stock
Concluding Tips on Investing in ASX Penny Stocks 💡️
Investing in penny stocks is a great place to get started, but it works best if you do not imagine it as a shortcut to getting rich.
Penny stocks are great if you invest in small amounts. If you try to bet big on penny stocks, then you might as well burn half of your money.
Whether you are hiring a broker, hiring seven brokers, or using an online investment platform to find them, trading penny stocks will get you a lot of experience and credibility.
Whether you make money or not, you will learn a lot about the market at a very low cost. Just do not bet the farm on it.
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