Penny stocks are common stocks that are typically valued at less than a dollar each. These stocks belong to companies that have low market capitalization, usually $100 million, and are more commonly traded outside the exchanges. The stocks of such companies would have been issued for trade in the market recently. They are created through an Initial Public Offering (IPO) of the company. The lower price of the shares of such companies is because they have a smaller amount of assets that are of the company. These companies have only a few listing requirements and the regulatory and filing standards are less regulatory. This naturally means a higher amount of risk is associated with the company with the result that they are usually considered to be highly speculative.
Trading Penny Stocks Online – Points to be kept in Mind
Trading in penny stocks is more suitable for those individuals that have an appetite for higher risk or for those that are able to tolerate high risk situations. They have a higher potential for reward when traded as they highly volatile. Because of the higher risk levels, it is important for investors trading in penny stocks to keep certain points in mind.
- Penny stocks can be purchased at very cheap rates and, therefore, they provide an opportunity for large gains (through high volumes that may be purchased) when traded.
- Penny stocks belong to the more risky and typically lesser known companies; it may therefore be harder to find buyers for these penny stocks.
- Before buying penny stocks, it is important to first analyze whether buying them fits your investment and money-making strategies.
- Penny stocks do not make ideal long-term investments.
- It is better to invest only as much money in penny stocks as you are willing to lose.
- It is of crucial importance to investigate about the companies before purchasing their penny stocks. Financial information about such companies can be searched for through Google or Yahoo.
- For information pertaining to the penny stocks market, it is a good idea to use services such as the National Quotation Bureau and the OTC Bulletin Board.
- It is important to be aware not to fall for fraudulent advertisements that promote certain penny stocks as good buy when they actually are not so.
Trading Penny Stocks Using an Online Brokerage Service
If you want to trade in penny stocks, the first step you can take is to open an account with an online stock brokerage service after making a small deposit. Sites such as TD-Ameritrade and E-Trade enable traders to buy the penny stocks and pay the fees. They also help the traders by regularly monitoring the price movements of the penny stocks. Penny stocks can be traded after the official hours. They are subject to a lot of volatility because of being traded after hours.
It is a good idea to place limit order purchases to buy the penny stocks that you want. Limit orders will help you to control the investment. By placing market orders, you may end up buying stocks that are priced more than they are actually worth. You may also end up selling the penny stocks at very low prices. Buyers and sellers tend to post unrealistic prices for the penny stocks.
How to Make the Best by Trading Penny Stocks
It is a good idea for you to spot good penny stocks by doing your own research before purchasing any. It is not good to buy a penny stock that is priced at rock-bottom levels but advertised as a winning stock. In most such cases the news will be false. Do not buy such stocks even if advised by a friend or a family member. In such cases it is better to be cynical and do your own research before buying these stocks. Investing in penny stocks of those companies that once were bankrupt but are currently on a financial restructure mode are worth purchasing. Their shares will be priced low at present but the value will go up in time.
In the beginning stages, it is worthwhile to spend a lot of time in front of the computer to study the price movements of the penny stocks. They make frequent trades. Regular activities that include research and watching the price of the stock will help to generate a pattern that can be taken advantage of by the traders and it will be easier for them to decide to buy or sell. At the end of it all, penny stocks are not the best for longer-term investments. However, they are good to speculate on and trade short term.
It has been observed in many cases that traders can make up to 20 or 30 percent in a few days’ time. If you wait for making 1000 percent returns on penny stocks, you may lose it all. The golden rule with a penny stock is not to wait for too long but to sell it quickly. It is better to get some profit than no profits at all.
Investors should look out for penny stocks that trade in volumes of over 100,000 shares a day. Trading with penny stocks that cost 50 cents at a minimum is also recommended for the beginner traders. If the cost of the share is less than 50 cents or if less than 100,000 shares are traded in a day, the deals will lack in profitability.
The bid-ask spread is usually high (about 10%) when trading penny stocks. If the trader uses hard stop losses, sometimes it can actually mean loss of money. Therefore, mental stops are recommended. However, this requires more concentration on the part of the trader.
Traders have to be careful about the portion size of the penny stocks that they want to trade with. Experts opine that it is best to trade only with a maximum of 10% of the penny stocks’ daily volume that is traded. The limited portion size helps the trader to get out of the stock faster.
At the end of it all, it is important for the trader to have realistic expectations and gains that are in the mind may take much longer to actualize.