The World of Trading Penny stocks

Penny stocks are basically cheap stocks that are traded under $5 per share. Also called micro-cap stocks or nano-cap stocks, they are also common shares of small public companies. This is precisely they are not available at New York Stock Exchange (NYSE) or the NASDAQ but are traded over the counter (OTC).  Penny stocks were originally defined by the Securities and Exchange Commission as a stock that traded for less than a dollar.  Today however, that was changed to a stock traded for less than $5, which show how penny stocks have kept abreast with inflation and provided evidence of its revenue potential.  

High risk and high yield

As its very nature implies, the biggest advantage of buying penny stocks is its very cheap price.  This is because penny stocks represent ownership of companies that are small, in the brink of insolvency or are overleveraged, which makes it risky.   This makes them available in pink sheets, which is an exclusive trading platform for penny stocks.  In spite of this risk, penny stocks can however give you a high potential earning.  In fact, the most popular companies offering penny stocks are can be reputed to be of a less risky investment.

Managing risk in Penny stocks

The appeal of penny stocks that they don’t cost much but can promise high earning potential. With a small investment, it can earn you a great return if the trade works out right. However, it can also make you waste or lose money. hence, it is important to manage your risk when investing in penny stocks. First off, you should invest only a small portion of investment money to penny stocks. Do not get blinded by the high potential of earning. Instead be wary of its high risk.  Secondly, you should learn how the market for penny stock operates so that you can strategize and create a plan.  Third, you should intensely monitor market changes because volatility of penny stocks is very fickle. And finally, you learn how to determine pattern changes so that you can at least conduct a prediction.

Penny stock trading strategies and tips

Don’t get carried away with rags to riches story.Focus on understanding market forces in doing and deciding what and where to trade.  Success stories that compares penny stock trading success to winning the lottery hardly occurs.

Tips and disclaimers.Learn the trading game instead of relying on tips and advises from experts, who are often writers who are paid to pitch a stock to lure investors to buy penny stocks of companies that promise high yields. Notice that most of them have disclaimers to free them from blame in case of botched or flopped advise.

 

Don’t trust company management.Don’t rely on information from the company management because they will always tell you promising information.  This is especially true for failing companies who are in a desperate attempt to raise money and save their business.

Concentrate on penny stocks that trade in high volume.The penny stock that is trading well is one measure that you can buy and sell your shares without fear of holding a losing share.

Fundamentals of Penny Stocks

Penny stocks are a unit of stock exchange that have a really low face value. Penny stocks are just like shares, but the difference is that shares attach a much higher face value than that of penny stocks. Like shares, penny stocks are also transferable – but unlike shares, they are very speculative in nature. Penny stocks are considered highly risky because of their lack of liquidity, smaller number of share holders, large bid-ask rates and limited amount of information that is disclosed to the public. In the western market, shares that are dealt in less than $1.00 are usually known as penny stocks.

Penny stocks come with a lot of risk attached to it but if you are lucky you can earn a small fortune while dealing with these stocks. Due to its low liquidity rate it, has the potential of turning into a large investment. If you buy $20,000  of penny stocks at $1.00 each and the price of the stock rises, then you might be able to earn $20,000 in a single day. This type of price rise is not usually possible in the case of other types of stocks, as more money is needed to invest in stocks that aren’t “penny stocks”. As a result, the capital investment needs to be higher that what it is in case of penny stocks.

Despite its perks, penny stocks are highly risky to deal with. They are price manipulative and thus the market can easily manipulate the stocks and that might result in a huge decrease in the price of these penny stocks. Apart from the risks of losing money, penny stocks are prone to scams as they are not regulated by national level stock exchanges. Because of its nature, the stock exchange deals with penny stocks in a different category; it’s dealt in a trade-to-trade basket. These stocks are to be delivered on the same day as you have bought them.

Now coming to the question where to buy penny stocks. Penny stocks can be bought from different investors. Like shares, you can buy them from investors who are willing to sell their penny stocks. You can also buy penny stocks directly from the company itself. The good thing about these stocks is that they are to be delivered on the same day you purchase them; there is no such waiting period and the paper work involved, and everything is minimal as compared to actual stocks that you buy from stock exchanges.

Penny stocks can also be purchased in the secondary market through various stock exchanges. It is always advisable that you buy your stocks from a government body or a stock exchange itself; that way your chances of getting into a scam will be minimal. If you are adventurous enough you can go ahead and buy these from Discount brokers. Discount Brokers will charge a higher brokerage for penny stocks,  so you need to consider different brokers and investment farms before you go ahead and place your bid.

 

Why do Penny Stocks Fail?

The penny stocks are amongst the most popular form of stocks for investors in stock trading. A lot of people these days invest in stocks based on recommendations or the word on the market without fully understanding what that investment means. It is important that you must have the basic knowledge on the stocks that you want to invest in. So if you are planning to buy penny stocks and are wondering where to buy penny stocks it then first you must understand what exactly are penny stocks?

Penny stocks and where to buy them?

Broadly speaking the penny stocks are micro capital stocks which involves a small level of investment per stock. A penny stock is essentially any stock that costs less than $5 of money. While this is not exactly the standard definition, however more or less the penny stocks are the ones that can be bought at a relatively smaller price. However the risk of losing money in penny stocks is comparatively higher than other stocks. This is because the penny stocks are considered as illiquid. However the trader who has good information about penny stocks also has a higher chance of making good return on their investment.

The penny stocks are generally very volatile and their prices keep going up and down throughout the day. So before you think of investing in the penny stocks it is important for you to understand the market risks. There are 2 things an investor or a trader must do before investing in the penny stocks. To begin with one must set aside a certain starting capital for trading. This capital should be beyond and bigger the funds required to survive the markets. It is always important to have that leverage when you are trading in the stock market.

The stockbrokers are one of the most important pieces of conducting business in stock market especially if you are a beginner. The stockbrokers are aware of market operations, the risk each of the investment carries with it, the logistical details, market movements and forecasts, analysis of different stocks as well as safe stocks to invest in. As a beginner you would need to rely on the expertise of these stockbrokers who are experienced and have a good knowledge of the market behaviour.

So it is important that you must select a stockbroker who is reputable and has a good history of transactions with its clients. Trust is an important factor in stock investing and once you choose to work with a stockbroker you would need to trust their expertise and knowledge with your capital.

Where to buy penny stocks? Well the answer to that is the two most common places of the market which is over the counter market (OTC)  and bulletin board. The quotations that you are offered at OTC are known as pink sheets which include a list of companies that offer stocks for trade every day. The stockbroker will be able help you with the logistics involved in the purchase of the penny stocks.