Facts Behind Penny Stock Trade
These days it seems all the investors gurus are talking about penny stocks that can turn you into a stock trading millionaire. Let’s explore this story and explain some of the basics of the penny stock trade.
Defining the Term
Penny stocks are low priced small-cap stocks. Their name can be misleading because they seldom cost a penny. They are considered to be any stock under $5 by the Securities and Exchange Commission (SEC). However, they are still sub $5 stocks being traded on big exchanges, but most inventors don’t regard them as penny stocks. To the majority of individual investors, penny stocks is the underworld of investing, far from the glamour that accompanies the stocks that are traded on big exchanges. On the other hand, penny stock trade is filled with sudden gains and losses, but also scams and corruption.
How to buy them
No matter if they are listed on a major exchange, penny stock shares can be bought through your stockbroker. Exchanges like NYSE and NASDAQ sell cheap stocks which although not considered penny stocks share a lot of benefits of penny stocks without the accompanying risk. These exchanges are more reliable, because although they may not allow for as much of an upside as real penny stocks can, they have strict listing requirements. Penny stocks are traded on listing services like Over-the-Counter Bulletin Board (OTCBB) and Pink Sheets.
Since penny stock are known for their violent fluctuation or volatility, this is the main reason why people are willing to invest into them. Investors believe that if they are lucky, their stock will surge from $0.08 to $8 in a matter of weeks. And not without a reason. Things like that have happened and people reading through investing message boards can tell you a story or two about investors who were making thirty thousand dollars with only pennies in their pocket. The crucial part is finding a right stock, as companies that can jump from penny stock to power stock in a fortnight are hard to find.
There are two main reasons why penny stocks are so prone to risk, and those are low liquidity and poor reporting standards. The truth is that even legitimate penny stocks are carrying very high risk. Penny stock investing is very niche market and even relatively low trade volumes have impact on a stock’s share price. SEC reports that penny stocks are traded infrequently, and once you buy them it may be difficult to get rid of them. Eventually, you may end up with a substantial amount of worthless stocks that you cannot sell.
What to Look for
In order to get the most of penny stocks and not the worst, you need to observe three parameters when picking a penny stock. Underlying business, financials and footnotes. Look for companies with tangible and sustainable business operations and quality financial reports and read the company’s footnotes.
Although penny stocks are risky by their nature and may be a scammers’ paradise, they can make a lot of money. Even with the risks and disadvantages, penny stocks are popular among a group of brave investors as their return can be impressive.
About Author: Dan Radak is a web hosting security professional with ten years of experience. He currently works with a number of companies in the field of online security, closely collaborating with a couple of e-commerce companies. He is also a coauthor on several technology websites.