Penny stocks – What they are and how to trade them

The very first thing that you need to know when investing in Penny Stocks is what exactly constitutes a Penny Stock?

The answer is that any stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges, is considered a penny stock.
The term itself is a bit of a misnomer because there is no generally accepted definition of a penny stock. Some consider a penny stock to be any stock that trades for under $5.00. Other investors consider any stock trading off of the major market exchanges as a penny stock.

 

Confusion can and does occur because there are some very large companies, based on market capitalization, that trade below $5 per share, while there are also a lot of very small companies that trade for $5 or more. In the end the most important factor to determine whether a stock is a penny stock is the assessment of its value.

In general the typical penny stock is offered by a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.

Some penny stocks do not meet the requirements for listing on the major stock exchanges but may be publicly traded. Generally, these lower-valued stocks are then traded on lesser-known exchanges and are called over-the-counter (OTC) stocks or ‘pink sheets’. They call them that because of the color of paper that has traditionally been used by the National Quotation Bureau. Pink Sheets are now the most popular outlet for penny stocks.

When it comes to trading Penny stocks there are a few basics that you MUST know and follow. Penny stocks are considered a highly volatile market and following the rules will help you to keep from losing thousands of dollars.

One of the first rules, especially if you are a new or novice trader, is to select a reputable broker. By ‘reputable’ I mean a broker that passes muster with you state’s Securities Commission. A discount broker is preferable, meaning a broker who only executes your orders for a fee. A broker that does penny stock recommendations and research will, in the end, cost you much more in commissions and fees and so is not advisable.

Another good rule is to be very careful with how much money you initially put at risk and how much profit that you want to try and make with each trade. Until you have a lot more experience start small with both. Now is the time to be disciplined and avoid big losses. Don’t let your greed get the best of you and you will stay in the game much longer. You don’t have to be overly afraid of taking some risk but don’t go overboard until you have more experience.

When investing in penny stocks remember the old adage about ‘not putting all your eggs into one basket’. Diversity is your best bet, as it is with any investment portfolio. In fact the basics of trading any stock can be used and followed with penny stocks.

Definitely stay away from any penny stocks that you were offered in unsolicited emails or that are sold by offshore brokers. Con artists are all over the place and will take you for everything if you let them. Better to find a broker online who specializes in penny stocks and can place your orders for you. These brokers are required to get written confirmation from you with any transaction due to the fact that trading in penny stocks is considered speculative.

Research any company you are considering investing in. Read articles in business newspapers and do an Internet search on the company owners. Also find out if there is a market for the product a company is selling before you day trade in its stock.

In many ways purchasing software for buying and trading penny stocks is the best way to go because it will let you buy and sell for a small fee but also get a lot more info that you can then customize for yourself.

Finally, listen to any and all news about penny stocks that you can get your hands on. Press releases, online message boards and chat rooms are a veritable treasure trove of great, unbiased information. By paying close attention you may get some very valuable information.

Good luck.