Trading Penny Stocks

If you have spent any amount of time online lately, you have probably seen all those little, seemingly innocuous ads for penny stocks. This is one of the ‘newer’ markets, probably on a par with Forex, for investing with a minimal amount of capital outlay with one of the greatest potentials for rapid profitability. Unfortunately, there are some things you need to know before trading penny stocks. The first would be to understand what small cap stocks are and the second thing to be aware of is to avoid tips at all costs.

Trading penny stocks is a good investment for someone who does not have a lot of money to invest or someone who has the money but is not willing to take a risk. There is potential to make a good bit of money quite quickly, but unfortunately, the risk of loss is proportionate to the potential for profit. Once you have had time to research small cap stocks and have a fairly solid understanding of them, it’s time to look at which stocks are good and separate them from those that have limited potential. Again, do not listen to tips and well meaning advice. Take the time to do the research on your own and make your own analysis as to what defines a good stock and one that has limited potential.

Now then, getting to the crux of the matter, a penny stock is not traded on the NASDAQ, AMEX or NYSE. Rather, they are considered to be low ticket securities for corporations that have a net worth of under $500 million. Also, these companies usually trade in low volumes in OTC (Over the Counter) exchanges such as Pink Sheets or the OTCBB. While researching small cap stocks, take the time to familiarize yourself with OTC penny stock exchanges.

In defining a small cap stock, the most accepted definition is that it is a stock that has a market cap of one-quarter to a billion dollars. Of course that doesn’t really tell you anything and in no way explains the recent fervor over trading penny stocks. One of the things you might consider important is that trading penny stocks are perfect for new investors since there is a small cash investment involved. Believe it or not, many of these stocks trade at amounts less than $5, some even for less than a dollar! This is where the term ‘penny stocks’ came from. Their low cost.

One thing you will see over and over again when trading penny stocks is that they can gather momentum rapidly which can yield a profit margin between 50 and 100% almost overnight. (Figuratively speaking!) Unfortunately, on the flip side they can lose that same amount just as rapidly should an investor unload a ton of shares quite quickly.

There are some things you should be cautious of when getting into trading penny stocks. One thing that is very important to understand is that not all stocks trading for less than $5 can be considered as penny stocks. They could have been major stocks at some point and lost that much ground along the way. Steer clear of these. This is why it is vital to understand small cap stocks and to do your own research.

Someone might give you a tip telling you to invest in a particular stock that they are calling a penny stock, but in reality it may be a major that saw a significant decline. Trading penny stocks is fun and exciting but it is in your best interest to understand what you are doing without relying on tips or advice from well meaning friends and predatory gurus. Learn the game and build your own portfolio as you go. Just start small and add to your portfolio only when you get the hang of it. Trading penny stocks can net you high profits if you take the time to chart your course.

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