In the United States, a penny stock is a type of common stocks that is traded for not more than $5 every share and is considered as OTC or over the counter transaction with the facilitation of quotation service like the Pink Sheets or OTC Bulletin Board. Even though penny stocks are assumed to be “thinly traded”, in actual fact the share volumes traded in this platform can be thousands or even millions for a sub-penny stock. This article will guide you on how to buy penny stocks.
What are Penny Stocks?
In the financial platforms of the United States, the phrase penny stock generally stands for any stock trading that takes place outside the major and most popular stock exchanges venues like AMEX, NASDAQ, or NYSE, and most of the time considered as negative transactions.
So what is a penny stock? Some stock traders mistakenly assume that a penny stock is a stock that trades for a cent. While there are many stocks that trade for a cent and when traded correctly can yield vast profits, the definition is broader. Some investors consider any stock trading under $5 to be a penny stocks. Those investors seek to avoid stocks they deem to be highly risky. Our only definition of a penny stock is a stock which trades either on the over the counter market (OTCBB) or on the pinksheets.
Start Buying Penny Stocks
If you plan to trade with penny stocks, you must pay attention to the penny stock brokers commissions and transactions fees since they will eat away at your returns. The first step is to open a stock trading account to help you find and buy/sell stocks.
Here is our top 2 recommended penny stock brokers:
For over 25 years, Scottrade has been the leader in the penny stock brokerage industry – and it’s for a reason. Scottrade provides a wide range of investment products to meet your investment needs and financial goals. Their fee per stock trade may be higher compared to others, but their service and support is great for beginners and have local branches you can visit to receive help and guidance to get you started. Open your Scottrade account today.
TradeKing is an online broker providing low flat trading fees with no minimum account requirements and no hidden fees. TradeKing online brokerage accounts offer easy-to-use investment tools with low flat trading fees and no minimum account requirements. Open a trading account with TradeKing.
Penny Stock Risks
Before you begin searching for the best penny stocks, you should initially become aware of the risks involved in this investment. Many novice investors are fascinated to the glare of penny stocks because of the deemed potential for fast growth and due to the low stock price. These are the usual promotions made to a stock that is being advertised. But, before you get into penny stock investing and learn how to buy penny stocks, you should realize that these investment vehicles are considered as high risk assets.
The risks involved are fraud, inadequate financial reporting, and limited liquidity.
Once you become skilled on how to analyze stocks, you will discern that sudden changes or movements in demand and supply of a penny stock can result to instability of the stock prices. Restricted liquidity can as well make it severely complex to sell a stock, specifically if there are no purchasers for that trading day. This can also result to short selling of stock.
Buying Penny Stocks
Although the funds required to begin investing in penny stocks are relatively low, you should not fail to study how to pick stocks that are profitable. You should be sensible and practical in your investment decisions, particularly on the type of company that you prefer to house your money into.
It’s important that you look at the trading stock volumes of your chosen company. To ensure investing success, try to look for a company that presents steady high quantity of shares in the market. If you become comfortable with a company that furnishes average stock volumes, you might not see profit or any increase in returns after some time. Assess the trade volumes of a company regularly and track its liquidity. This is crucial because when no volume is recorded, you are only keeping dormant investments in your portfolio. Thus to make money, you have no other choice but to sell your shares at lower prices.
If you feel that a new company will perform well in the future, invest in it. Definitely, new enterprises face losses at the outset of their operation. Don’t just sell your purchased stock from them without even understanding the setbacks taking place. Understanding how to buy penny stocks will give you critical pointers to find out if the problems of a company are manageable. Remember that a skilled company has the ability to produce profits even in low times, and when it progresses, your value as a shareholder will improve at the same time.