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Putting a portion of your portfolio into an investment in penny stocks is something that may make sense for you. Penny stocks, also referred to as micro caps, encompass all stocks that trade at $5 or less. They are not just those stocks that sell for under $1, as commonly believed. Penny stocks are not expensive at all for the average investor. Because they are so affordable, they allow for a greater degree of portfolio diversity since investors can afford to own several of these at once.

Micro caps can be very attractive because it’s possible to see a very high return on your investment for a small change in the stock’s price. As an example, if you purchase a penny stock for $0.25 and it goes up in value to $1.00, you just quadrupled your money! Even though the stock’s price increased just a small amount, the ROI was almost unbelievable. In contrast, a $0.75 price increase on a company’s stock that is selling for $60 would not be anything to get excited about. Clearly, you can see that lower priced stocks have a greater ROI on small price increases. Such price moves are not uncommon at all with penny stocks.

One very simple way to trade these affordable stocks is to locate one that is forming a rolling pattern on a chart. Essentially, a rolling stock is simply a stock that trades consistently between a high and a low point on a chart. In other words, the stock trades within a range. Every time a rolling stock reaches either a high or low point, it reverses course and trends in the other direction. Identifying a stock that is trading within a range is very easy to do on a stock chart. After locating a rolling stock, the strategy to trade it is very simple. You buy the stock when it is at the low point of its range and then sell it after it climbs to the top. It’s as simple as that. You can do this over and over with rolling stocks for repeat profits.

Consistent profits can definitely be made with penny stocks that are trading in a rolling pattern. There are, however, some important things you should keep in mind before purchasing these stocks. The first thing you should consider is that penny stocks are affordable for a good reason. Penny stock companies could be brand new companies without an established history or even companies that have had some negative publicity. Always take the time to look into a company’s past to see if there’s something negative that has caused the stock’s price to decline. Also, investigate whether the company has a solid future ahead of it or if its future looks shaky.

Trading volume is another important thing you should consider before purchasing any penny stock. Without adequate trading volume, being able to quickly sell a stock might be a problem if you need to unload it quickly. With good volume, however, it’s very easy to quickly sell a stock.

Investing in penny stocks can be very rewarding and lucrative. Before you start your penny stock trading journey though, definitely be sure you are aware of the potential negative aspects of these securities.

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