New investors often believe that the cheapest stocks-the ones with low share prices are the best bargains. In fact, they sometimes fall into the trap of believing that the shares with the lowest share prices have a great potential of raking in huge sums of money.

After all, you only need a stock which share price is $ 1 to earn you $ 1 to double your money, and a share price of $ 100 to earn you $ 100 to double your money. Even, though this math is absolutely correct, it is often misleading.

The secret to making good money in the stock exchange is to have patience. So, all investors need to do is figure out how penny stocks work and learn how to make money from them.

Definition of Penny Stocks

These are stocks that are worth less than a dollar for any share traded. Since they are so cheap, they are more appealing to many investors.

For example, if you have 1,000 dollars, you may end up buying many shares, and a small movement of say ten cents towards any direction will earn you a lot of money. For a new investor, this appears to be the easiest way of getting rich through investing.

Buy Penny Stocks, Sell at Higher Price

The first way you can make money with penny stocks is to sell them to others at an inflated price. First, you need to pump and dump. Perhaps the most famous means of making a lot of profit from a small cap is to buy the stocks when they are cheap.

Then, you convince as many people as possible that they are worth more than you bought it from, then sell these stocks at the inflated price. Unfortunately, this method is often unethical and potentially illegal in the place where you stay. It is also hard to make it work sometimes.

Hit the Jackpot!

Another to make money at this is by simply getting lucky. In fact, it is more ethical to purchase stocks from a valuable company then hold on to them for a while until their prices have increased tremendously until that point where you can register a profit. Unfortunately, it is often a daunting task to predict luck.

There is no precise formula in finding all of the cheap and good stocks to invest in. Similarly, not all cheap stocks are good and by no means are all good stocks cheap: a company that has gone through financial distress can easily go into liquidation, selling all of its assets to pay creditors, and pay you some percentage of what you had invested in the stocks.

Find a Turnaround Company

More often than not, a company may go through a series of a horrible bankruptcy, which can lead to a major restructuring, or resulting to another company buying it at a great value. Perhaps, the company may turn things around from huge amounts of debt or it has some capital equipment, inventory, patents, real estate, or other forms of assets that have huge sentimental value to the acquirer.

Therefore, if you become careful and conduct a thorough value analysis, you are likely to find a turnaround company that has the potential of being listed on a top exchange.

That said, you have to be careful when investing in penny stocks. Even though, the stock may have a great price and appears to have a great potential of doubling or tripling your investment, you have to be calm and careful. Do your own research. This way, you will ensure that you earn some good money after sticking to value investing.

Source by Sharina Smith