Interested in Getting Started with Penny Stock Trading?
Penny Stock Trading brings different things to mind for different people. Some immediately think of Penny Stock trading as very risky and only for gamblers. Others think it is the only way to make a lot of money quickly.
First of all, any type of trading is only as risky as we allow it to be. If we are an informed, educated trader, we probably know how to control our risk at most, if not all times.
We have the power to determine the amount of money used for every position as well as which stocks to pick and when to get out.
There are of course other variables, some not in our control, but for the most part we have the power to make choices which can control, and/or limit our risk.
As far as the only way to make a lot of money - while this is certainly one way to make a lot of money if you're lucky (more on that below), it is certainly not the only way.
What is Penny Stock Trading?
The definition on what stocks are considered Penny Stocks vary from one person to the next, and one website to the next. For example, the U.S. Securities and Exchange Commission states "the term 'Penny Stock' generally refers to low-priced (below $5.00), speculative securities of very small companies.
On the other hand, many traders refer to stocks priced below $1.00 as Penny Stocks while others will refer to stocks priced under $10.00.
Overall, Penny Stock trading involves low priced securities of companies with a small market capitalization. Many of these companies are listed and quoted "over-the-counter" on places such as the OTC Bulletin Board or the Pink Sheets.
Some of the Risks with Penny Stock Trading
- Lack of volume in publicly traded shares.
Although you may see a large number of shares being traded, due to the low price, many of these shares may be a small number of traders. In this case, once you are in a position, it may be hard to get out. A way to help minimize this risk is to search for a minimum number of shares being traded to fit your needs.
- Pump and Dump
This is common for low priced stocks due to the lack of regulation and enforcement of Penny Stocks. Many "Stock Promotors" are paid to send out mass mailings and emails, "Pumping" up the hype around a particular stock. Just like any other investment you make, due your own research before making any final decisions.
- Lack of Financial reporting requirements.
Many low priced small cap stocks are not required to file the same financial documents as larger companies, therefore it makes it harder to take a look at the numbers behind the company.
Rewards of Penny Stock Trading
Rewards. Yes, there can be rewards also. I'm sure you've heard about them at one time or another. Take a stock priced at .20 that trends higher over a few weeks or months and is now trading at $2.00, or better yet, how about $5.00. Or a stock trading at $2.00 that moves up to $10.00. You can find them, and they are out there.
On the other hand, since you now know that a "Pump and Dump" can happen, you can short a stock that has moved up too quickly, too fast, for no good reason and profit from it's downfall.
In order to be around to profit from these moves you must have a trading plan in place that works and stick to your rules at all times. If you don't have a proven trading plan for Penny Stock Trading, the next best thing is to follow along with somebody who does.
When making the decision to trade low priced stocks, be sure to consider learning where to buy Penny Stocks and find out where not to buy Penny Stocks based on some brokers having outrageous commissions. You'll be glad you did.