It is usually suggested that amateur traders avoid penny stocks. Yes, trading the $5 and below stocks does come with a share of risks, but what stocks are completely free of risk? If penny stock investing is adequately researched and strategized, it can be a great way to enter the stock market.

Small businesses can hold great growth and investment potential. An investor can get a multi-bagger, (a stock which gives a return of more than 100%) if they get on board at the start of the business’s growth journey. Investing in smaller and less liquid companies can be a serious wealth-building opportunity.

Of course, there is more than one strategy when it comes to investing in penny stocks, but there are some general tips to keep in mind.

Penny Stock Investing Tips

Research, research and more research: Read up on the company an industry you are thinking of investing in. A simple google search can provide a world of knowledge.

Diversify: Diversification is crucial to balance the ups and downs. Just one multi-bagger can dramatically increase the value of your portfolio and cover any losses.

Keep an eye out for scams: Remember, penny stocks are traded on OTC exchanges, and not on well-regulated platforms. Scams are out there. Your decisions should be based on financial reasoning alone— keep emotions out of it.

Use a stock screener: Narrow down your choices by creating a list of screening factors. A stock screener can filter earning, growth, cash flows, dividends etc.

Do not risk more than you can afford to lose: Always consider the worst case scenario.

Review balance sheets: Just like GE and Amazon, penny stocks are businesses. Companies with strong historical growth and low debt will do better.

Do not sell short: In a short there is a possibility of losing an unlimited amount. Avoid short selling, especially if you are new to investing.

Know the business: If you cannot explain the business you may invest with in three sentences, you are better off looking for opportunities elsewhere.

Work with seasoned brokers: Deal with an experienced broker. Brokers who have done in-house research typically specialize in helping new investors get their start. And as always, referrals are key.