Most investors take penny stocks trading into consideration while choosing to invest and make money through low-value stocks. Trading penny stocks are considered to be the first logical step towards online stock trading. Most people tend to choose this because penny stocks carry a low share price of less than $5.
Penny stocks are not created for everyone however they provide a lot of great attributes. It is a smart idea to buy something for a few cents and then selling it on a larger amount for potential benefits just when its price gets higher. They turn small investments into large-scale.
Most people presume that penny stock trading is risky while most excitedly invests in it and expects profit. Having said that, risks are still there, big rewards do not outweigh the risks. Anyhow, people who experience loss most probably end up buying the wrong stock at wrong prices. Along with that, they don’t focus on the 52 weeks high/low factor where it becomes easier to determine the current value of the stock by comparing its prices with the previous year. It is a technical indicator that some famous penny stock traders use to predict future price movements such as Timothy Sykes.
However, these investment risks are easily avoidable by acquiring knowledge and understanding of penny stocks and penny stock trading.
What is a Penny Stock?
The Securities and Exchange Commission (SEC) explains the term ‘penny stocks’ as a security issued by small companies to the investors or buyers. They are micro-cap stocks of small companies that are traded at low prices per share, generally under $5 or less than that. Penny stocks are inexpensive stocks that hold rewarding benefits.
Penny stocks are traded off through smaller exchanges as bigger stock exchanges are confined to their own requirements such as issuing a million shares of stock or having earned more than 10$ million over the last few years. Larger exchanges include Newyork Stock Exchange and the National Association of Securities Dealers Automated Quotations.
Penny stocks are traded over-the-counter of small exchanges through electronic systems. They are not the kind of stocks that are traded regularly such as iShares or ProShares. The lack of liquidity is a major challenge that investors face as they get stuck in a position for several weeks or months in order to sell their stocks at the best price.
Chances are that some companies who trade penny stocks at the price of $1 or less than them are bankrupt. When a company is declared bankrupt, the shareholders of the company are entitled to a portion of their liquidated assets. Along with that, the company is required to sell its assets and pay off all debt.
How To Invest In Penny Stocks?
There are a few simple steps you can follow to trade penny stocks. However, it is necessary to collect additional information and educate yourself regarding those steps to get potential and quick profits. We have briefly mentioned them below:
- Learn Paper Trading:
To avoid getting in trouble and making mistakes, you can start off with paper trading that is risk-free and requires no money. You’ll be required to keep track of imaginary trades by writing down the buying and selling decisions rather than placing actual orders or investing money in the brokerage.
Paper Trading is a simulated trading method where investors supposedly practice trading of securities without risking their money. It effectively builds insight and improves a skill set of traders at every step of their journey even when they would choose to trade other stocks.
- Start Trading Penny Stocks:
After learning to trade effectively through paper trading, you can start off your trading business as a professional. This will be a knowledgeable jump in the market of penny stock trading.
Make sure you do not make the common mistake of investing in whatever is considered as the ‘hot penny stocks’. This means people talking about it or the one that is shown a lot on the news channels. The reason we mentioned it as a mistake is that it will be the overpriced and overcrowded one.
In addition to that, you can choose to use the stock screening tools where you can easily determine in which stock to trade. Stock screening tools can be found on OTC Market or Finviz which makes it easier to decide based on your strategy and risk tolerance. You will be able to run the filter by mentioning a few details and by making necessary adjustments.
On the website of stock screening tools, you will see different lists and columns as suggested by the filter. The names will be included of the companies trading penny stocks, along with their sectors and prices.
- Make An Account:
Penny stockbrokers are required to open an account with a minimum balance of $500. You can easily sign up to accounts online and can instantly receive trading tools, webinars, articles and online videos on trading strategies and procedures.
There are certain factors to consider while opening up your trading account. Those factors include ease of transferring funds, having professional customer services and submitting fees. Other than online brokers, you can choose anyone from different areas that will meet your needs.
One main aspect to pay attention to is the fee structure where the customers and clients will easily determine what to expect when working with the business on various services and activities. It is important for you to examine the fee structure completely before buying penny stocks from the company Some brokers also charge for commission for a certain period of time.
Other than fee structure, another aspect includes a per-share structure. It is considered to suit better for the investors who buy a relatively low number of shares. It may prove to be useful for those who initially start their business and choose a broker who provides low rate per share. The lower the rate per share, the lower commission you will have to pay the broker.