Thinking of Investing in Penny Stocks? Here’s All You Need to Know
Penny stocks have always lured investors with hopes of big gains. But, can they really fulfil those hopes and turn your dreams of a profitable investment into a reality? With low liquidity and high volatility, investment in penny stocks can be quite a risky venture. These are the kind of stocks on which trustworthy information is hard to find. So, what makes so many investors so interested in it? To find the answers to that and to know what are penny stocks, let’s delve deeper into the matter.
So, what exactly are penny stocks?
In terms of what penny stocks are, the simplest definition is that these are the shares of small companies that trade at really low prices, and can go anywhere from $1/share to $5/share. The former is what we call the true penny stocks and the latter is how the U.S. SEC (Securities and Exchange Commission) defines it.
These are really speculative, and thus, the shares allow investors to buy a high number of shares. The lowest price earned of only a couple of cents can easily turn into a huge percentage increase. These are the aspects that appeal to investors in spite of all the high risks. What they also need to consider is that dropping a couple of cents can mean huge losses.
Where to buy penny stocks
The first thing that you need to know is where the low cost stocks are listed. There are a few services that are noteworthy in this regard, namely, the Pink Sheets and OTCBB (Over-the-Counter Bulletin Board). At OTCBB, you will get the less risky penny stocks, and the Pink Sheets have all kinds of stocks without any strict restrictions.
Cheap stocks are really easy to purchase, though these are not listed on any major stock exchanges. After all, you cannot simply use the same stockbroker for anything and everything. So, you can buy penny stocks from OTCBB, NASDAQ, or other listing or exchanges; the process remains the same.
How will you find the stocks to purchase?
A great thing about trading in penny stocks is that you will not have to find a broker. If you are already involved in stock trading, your current broker can deal with all the transactions for you. So, since you already have a stockbroker and you know about low cost stocks, the only thing left to do is start searching for penny stocks where you can invest. The following are a couple of approaches that you can go for in this aspect:
- Check the listings of stocks in the Pink Sheets, OTCBB, or any other exchange that you want. Start researching the companies that you have considered.
- Search for lists such as ‘top penny stocks’, ‘top ten penny stocks’ and so on. But ensure that you only check the sites or publications that can be trusted.
- A great way of finding low cost stocks after you know what they are is to sign up for notification services. You will have to pay monthly fees and the top picks are notified to you through SMS or email. Some of the services also have email training, community access, and video lessons.
Many beginners end up buying the top stocks that are recommended. But this is not really ideal. Though you will save time, there is a high chance that you will lose money. Do your research if you want to win at trading penny stocks.
The right ways to buy stocks
It’s okay if you are not sure about how to buy small stocks as a beginner, and knowing about penny stocks is all you have basically done. Simply open your brokerage account where small stocks are offered. Penny stocks are usually traded on OTC, NASDAQ, and NYSE markets.
For opening a brokerage account, you will have to confirm your risk tolerance and personal identification, but there is nothing complicated about the process, and it takes no more than twenty-four hours to be completed.
However, make sure you take your time for demoing the trading platforms before choosing brokers. After your account is set at a brokerage, go ahead and purchase penny stocks with ease.
So, where can you buy low cost stocks?
You will get penny stocks at OTC, New York Stock Exchange, and NASDAQ, and you will need a stockbroker to buy the stocks. You can purchase the stocks using a couple of discount brokers.
Some of the considerations that you need to have before choosing the broker are share locations, the minimum amount of the deposits, commissions, chart features of the platform, and the ease of using the trading platform. Check if there is an option for demoing before you decide. Some traders prefer having multiple accounts from different brokers to make their trading more flexible.
The qualities of the best stock broker
Your best choice would be the one with a trading platform and a reasonable commission structure. For instance, there are several popular apps that do not provide OTC penny stocks to the customers, except on some special occasions.
Before you choose a broker, consider the commissions and the ease of using the trading platform of the broker. What special features does it have? Does it come with quality charts? These are the questions that any seasoned trader will ask before choosing a broker for smaller cost stocks.
The questions to ask yourself before investing
If you seriously want to win it at trading with penny stocks, you will have to research any company that you are considering. The following are questions you will have to ask yourself after you know what penny stocks are:
- Is this even an actual company? You will get copious amounts of shell companies in cheap stocks. The shell companies are incorporated legally but they don’t do anything. These companies are there for either branding or for dealing with the finances of the company that owns them. They can even be set up for future uses. Basically, they’re inactive, so look for real companies that produce real products with real services and not those inactive shell companies.
- What about the finances of the company? Take a look at the financial statements of the company to know if they are filed on time and whether or not the figures are right. Moreover, check whether you are able to find any independent auditing done on the company and the results of those independent auditing initiatives. The business structure of the company needs to make sense and the fundamentals have to be right.
- What about filing footnotes? Footnotes may include information with regard to future activities that are expected to have a significant impact on the business. However, penny stocks are a different story.
The story here is the reason why the stocks of the company are valued so low. It can be a common occurrence in the industry to which the company belongs, such as mining. The company can be new to the industry. Another scenario is when the successful and established companies plummet in value before coming right back up.
These are all sound and reliable investments for you. Agreed, there are diamonds in the rough, but those are hard to come by. The whole point of this discussion is that you need to be sure that the stock will rise if you are buying it.
Believe it or not, even the most established companies in the world were low cost stocks once. The huge profit potential is what makes people interested in penny stocks. However, Wall Street analysts do not usually cover the smaller stocks, so you will have to do the work of analysing. Go for penny stocks that have transparency and where the key information about the business and financial outlook are disclosed.
The scams associated with penny stocks
Perhaps the biggest problem with these kinds of stocks is that it is full of scams, especially pump and dump schemes. Pump and dump schemes are situations where the shareholders of the penny stock try to inflate the price of the stock artificially by circulating wrong information. Thus, the prices go on rising, and finally, the stocks are sold and they cash out. It’s a surprisingly neat strategy in terms of penny stocks!
The materials and websites that these scammers distribute look absolutely trustworthy and official. But once you purchase these stocks, you will just lose a lot of money by putting in the effort for worthless stocks.
Well, there is a way to get around this as well. Just be thorough with your research about penny stocks, as has been mentioned earlier, each time you think of purchasing cheap stocks.
So, should you really consider investing in penny stocks?
Truth be told, trading in low cost stocks is not for everyone. However, if you have the right mindset and personality and you understand what are penny stocks, making money in the market is not too difficult. Start by asking yourself whether you have the given traits:
- Persistence to wait for good investments (and only good investments) to come around
- Attention to detail, critical thinking, and research skills
- Perseverance and discipline to stay in trading for penny stocks in the long haul
- Keep a grip on your emotions. It sure is exciting to trade in stocks, but getting into the game only for thrills is going to cost
- The investors that rake in the most profits are the ones who are honest about themselves and their decisions. Otherwise, how will you know where you are going wrong? And how will you right those wrongs?
So, do these qualities sound like you. and have you understood what penny stocks are all about? If yes, low end stocks are the way to go for you to earn those profits.
The stocks to purchase
Before figuring out what are penny stocks and what you can buy today, create a watch list. You should buy penny stocks that come with a catalyst, because stocks with catalysts are generally volatile and you require that kind of volatility for capturing short-term profits.
The stocks do not come under the radar of most of the analysts, and thus, even news stories can move penny stocks, creating volatility.
Day trading in penny stocks
Day trading in stocks can turn out to be really profitable when you are on the right side. Since the penny stocks come with low caps and are not covered by the Wall Street analysts, they tend to fluctuate more if there are news events regarding the stock, which is something you should know along with an understanding of low cost stocks.
Subscribing to services that send you alerts about breaking news can be useful if you want to day trade in penny stocks. However, there are more things that you will have to consider. You can also use the notifications sent to you by your trading platform, which mention those substantial daily moves.
Wrapping it up
Selecting penny stocks is not easy, but once you know about penny stocks, the payoffs are huge. One thing is for sure, with penny stocks, there is no scope for boredom. It is like a rollercoaster ride of volatility. Yes, there are more worthless stocks than good ones, but spot the diamonds in the dirt and you will make money as you have never even imagined. So, the question here is: are you ready to get on that rollercoaster?