Penny Stock Trading
by Will
Most consider penny stock trading to be the exchange of stocks at a price between $1 and $5 per share. You’ll also see penny stocks labeled as micro cap stocks, microcap stocks, nano stocks or even just small cap stocks.
Penny stock trading occurs within the OTCBB (Over-the-Counter Bulletin Board) or on the Pink Sheets. So you’ll also find these stocks labeled as OTC stocks (OTC stands for over-the-counter) and you’ll sometimes see the OTCBB and Pinks Sheets referred to as the penny stock market. Penny stocks tend to represent smaller companies, newer companies or struggling companies. They either haven’t proven themselves enough to list on NASDAQ or the grand New York Stock Exchange (NYSE) or in some cases they’ve been penalized by those exchanges and removed.
Penny Stocks Aren’t Cheap
There is a common misnomer regarding penny stock trading. Because of the term “penny”, people seem to think these stocks are somehow less risky than “regular” stocks. This, I’m afraid to inform you, is not the case at all. In fact, penny stock trading is probably more risky then standard trading because they’re so volatile and have little information available. Let me explain the disadvantages to trading penny stocks so you understand what you’re getting into with these profitable but volatile little devils.
Penny stocks lack liquidity. Most penny stocks trade strictly for the profit of the trade rather than for the sake of investment. This means penny stock investors rarely have an interest in the long-term future of the stock. This minimizes share prices and thus minimizes available liquidity.
Penny Stock Risks
Additionally, trading penny stocks involves trading companies with minimum financial data available. Major exchanges such as NASDAQ and NYSE feature strict guidelines to financial reporting, but Pink Sheets and the OTCBB do not. So you’ll often be heading into the dark with penny stocks. This doesn’t mean you can’t find this information on your own, but it will be more difficult and less regulated.
In a related topic, you’ll often find it difficult to ascertain a penny stock company’s background. It is vital that you do your due diligence when it comes to companies traded as penny stocks. Micro cap stock companies often have little to no history or they may even have a questionable history which they don’t necessarily want you to know. Don’t be impatient; you must know the company background when you engage in penny stock trading.
Penny stock traders often just “play” with penny stocks, trading regardless of a company’s potential. However, to secure your investment you really should investigate the nature of the company and its direction before risking your money in penny stock trading.
Practice investing Stock With Paper Trading
I suggest investors, veterans and newbies alike, familiarize themselves with penny stock behavior through paper trading online before diving into penny stocks with real financial risk. Then when you start, rely on a reputable and established penny stock broker rather than some hyped service with little record. Be wary of services offering penny stock tips and trades all-in-one.
I do not mean to dissuade you from making yourself some money through penny stock trading; you certainly can make penny stocks profitable. But I find many people researching penny stocks seem to be looking for a means to get rich quick, and without the proper tools and resources, they’ll actually find themselves on the fast track to getting poor quick.
Take it seriously and be responsible and yes, you can make some real good money buying penny stocks.
More than anything, try to develop an understanding of the similarities which exist among multiple successful small companies. Look for the health and potential of the actual company and don’t fall for crooks temporarily inflating penny stock values with pump and dump schemes. In short, do your penny stock research.
You can enjoy great success with online penny stock trading if you’re responsible and exercise due diligence.