The SEC defines penny stocks as those shares priced at $5 or less. These are usually traded over-the-counter (OTC), the most common markets being the OTC Bulletin Board and OTC Link LLC. These are highly volatile, speculative and low-liquidity items.
Seasoned investors know that penny stocks are sometimes hard to price accurately due to their nature of infrequent trading and lack of transparency of the underlying company’s financial records. The outcome could be excellent or a total disaster and the legislation forces traders to get the written permission from investors that they acknowledge and accept the risks.
Penny Market Characteristics
Traded initially on what was known as pink sheets, penny stocks are now included in an electronic quotation service, similar to cryptocurrency markets. An investor can choose between 10K companies.
First and foremost, this is a very speculative tool and should only be used with care, as part of a broader strategy which also includes risk hedging. The good news is that it can yield spectacular returns due to its volatile and unpredictable nature.
Next, it is worth noting that the companies usually have small stock valuations, no more than $2 billion. There is also a considerable difference between the bid and ask prices which generates instability and low liquidity.
How to trade penny stocks?
If you are asking how to start investing in penny stocks here are a few tips. As in all things related to investments, you need to define and follow a strategy even when you are losing. First, find a broker or a reliable platform and get used to the language, abbreviations, and companies. Learn about different verticals and then delve into specific companies. Learn about the board, the management style, possible M&As and more. Keep an open mind about more stocks and don’t put all your eggs in the same basket.
Beware of fake news, paid advertising and other means companies use to influence the markets. It is not unusual for a company who wants to sell more stocks to pay for good word of mouth regarding its estimated performance. Check the source’s reliability and look for confirmation from other independent publications.
Penny stocks FAQs
Since these are not your usual investment tools, as a new player on this market, there are a few standard questions you might have for brokers.
1. How to get started with penny stocks?
Since these are very cheap, it doesn’t make sense to pay a human broker, since their commission could beat the profits. It is much better to use an online trading tool. Only proceed after you have enough know-how and thorough understanding of the phenomenon.
Choose those stocks which you can buy cheap and sell fast for profit. These are by no means the kind of investments you keep too long in your portfolio to grow. Due to their price, even a $0.50 increase is enough incentive to move on. It’s about volume, not value. Therefore, you need to be online almost every day and be patient. You can make a fortune from penny stocks over a few years, just think about Jordan Belfort, the Wolf of Wall Street.
2. What are the best tips and tricks for successful penny stock trading?
If you are about to go into any trading, be sure to learn a few things about charts, patterns, and Japanese candlesticks. These are mostly visual ways to understand market fluctuations. For a starter, you can learn by heart the candlestick patterns and what they mean and try to anticipate market fluctuations and sell/buy moments.
The broader discipline is called technical analysis, and it is perfectly fitted for short-term trading. Many cryptocurrency investors rely on the same principles.
However, always keep in mind that it is possible for a penny stock to just go fast to nothing, without warning.
Another way to stay ahead of the market is to learn about fundamental analysis. This means investigating the company’s financial records and assessing the health of the company by looking at debt rates, liquidity, and product portfolio. Although this is a tool usually focusing on long-term investment, it can be used for penny stocks.
If you anticipate a market upturn, it makes sense to hoard penny stocks, while on the brink of a potential meltdown it’s time to sell.
3. Any other advice for the best penny stock to invest in?
As this is a type of investment which is highly speculative and under the radar, it will take some research work to find the next big shot. It would be best if you searched in the news, look at fluctuations charts and even talk with members of the board to learn about upcoming changes or capital influxes.
As a way to hedge your risks, it makes sense to put a spending limit on each stock. By creating automatic orders, you have a precise range of profit and loss. At all times keep in mind that this is not a type of investment for the faint of heart ora way to multiply your Roth savings.