iTrading School Trader Training Monthly Lesson
All About Trading the Penny Stock Market
Exactly What are Penny Stocks? How Risky Are They?
Can Money be Made Trading Penny Stocks?
Do research about trading the Penny Stock Market today before you start actively trading this high reward but very high risk and thinly traded market. Penny stocks (penny shares) are investment options for traders who have a small amount of money for investment and are willing to take high risk for potentially big rewards. Penny stocks are generally available for very small amounts and even a small investor can take the risk of investing a few cents in a share.
Although there is risk with every investment in the financial markets, penny stocks are good options for investment if you have some disposable income, as only a small amount needs to be at risk. Stock brokers trade penny-stocks and it's good to understand the financial terms associated with penny stocks. We add if you are looking at penny stocks for investment, you should learn more about penny stocks and you can find relevant information about the subject in investing newsletters, trading websites, blogs and forums.
Penny Stock Trading: Penny stocks are quite speculative and have a market capitalization of over 500 million. These stocks are traded over-the-counter and sometimes over an electronic trading network. The live trading is governed by SEC rules and guidelines on penny stocks. The U.S Securities and Exchange Commission has rules for investment and trading in penny stocks and a beginner should keep these rules in mind before buying or trading in penny stocks.
SEC Rules on Penny Stocks: Broker-dealer registration compliance is must before buying or trading any penny stocks. A broker or dealer should get a written request and thereafter should approve the investor.
SEC further rules that a customer desirous to purchase a penny stock should be provided a document mentioning the risk involved in the penny stock. The broker or dealer should also inform the customer the current market rate of the penny stock and the brokerage commission charged by the broker, who will be a licensed broker working at a discount stock brokerage firm.
Sometimes the other terms such as small caps and micro cap are also used for these companies and The U.S. Securities and Exchange Commission has defined a penny stock as a low-priced below $5 speculative security issued mostly by new and small companies. Many small companies have low assets and offer their stocks at very low price. These low price stocks are commonly known as penny stocks and typically trade over the counter in low volume.
The Securities and Exchange Commission strictly adheres that penny stock is low priced speculative stock and the term penny stock does not relate on market capitalization or it’s trading at the exchanges (NYSE, NASDAQ) or over the counter.
Penny stock’s definition by the Securities and Exchange commission is strictly on the basis of its value and it does not depend on other parameters such as the companies market capitalization or its listing. Investor should carefully examine all the factors associated with penny stocks before investing in them.
Trading in Penny Stocks
The trading of non-penny stocks takes place at various stock exchanges, however penny stocks trading generally takes place outside of national stock exchanges such as NYSE and NASDAQ. Most penny stocks are traded in over the counter markets or pink sheets and some shares are available for pennies. A few penny stocks has a huge potential to reach the better levels and even competes the regular stocks, however there is a need to correctly identify these stocks. Smaller companies whose market capitalization is below several million offer the penny stocks and as soon as the company grows, there is most all the time a sharp increase in their stock price.
The major stock exchanges include the NYSE, NASDAQ, OTCBB and pink sheets. Penny stocks are generally traded at OTCBB and pink sheets, however as per the guidelines of SEC penny stocks can be traded in all the exchanges.
There are various minimum requirements for listing of shares by the companies at NYSE and NASDAQ. There is only one requirement for trading of penny stocks at OTC and that is the company should remain current in SEC filing. There is no place for penny stock quotes if the stock does not meet the minimum standards set by different stock exchanges or OTCBB. Sometimes the penny stocks already being quoted at OTCBB, do not meet the SEC requirement will be allowed a certain period for completing the formalities and if the companies do not fulfill the required condition even after a 30 or 60 period of grace time, the penny stocks will be removed from their listing.
Pink sheets play a major role in over the counter trading. National Quotation Bureau or NQB provides this service. In actual the NQB prints the details of share prices and other information on pink sheets, as it is difficult to obtain the prices of these shares otherwise. Most of the time brokers get the price and other information on penny stocks from market makers and provide it to the customers. In today’s Internet era, you can find the details of penny stocks just a click away at the website of pink sheet. A company has to meet the minimum requirement of pink sheet for listing and quoting of the share at pink sheets.
Companies prefer to list the shares at NYSE, as it is highly preferred stock exchange. The next preference is given to NASDAQ where many mid cap stock fund trades take place. The NASDAQ market in recent past has become more popular and companies who have listed their shares at NYSE are also interested to list the shares in NASDAQ and provide NQB NASDAQ Quotes. The last preferences are the OTC market and Pink Sheets.
Summary: Various stock exchanges have laid down the minimum requirement for listing of the shares at the stocks exchanges. Pink sheet has the minimum requirement for listing of shares. However in this age of Internet the share information can be gathered at the website of pink sheets.
Risks in Penny Stock Investments
There is always a strong risk factor related to every stock or futures trade, however by being traded at fewer places, penny stocks carry even more risk. The risk factor increases if you avoid some precautions that are necessary.
The investment in penny stocks is highly risky due to various factors. Some of the common risks are as given below.
Whatever the information comes to us that comes either through stockbrokers or through the agents of companies offering penny stocks. The seller or broker who sells the penny stocks might get money from the company for selling the shares and therefore can mislead the investor. It is therefore necessary for the investor to carry out the detailed research before investing in penny stocks.
It is sometimes difficult to find the buyer of specific penny stocks you have purchased from the broker even the same broker may not be interested to repurchase the stocks from you.
Sometimes the companies having no financial asset or no financial history comes in the market and collect money from investors and therefore before investing in penny stocks, you should study the company offering the penny stocks. You should study the prospectus of the company very carefully and should see whether the share prices of the stocks are justified. Some of the dealers sometime inflate the stock prices fraudulently.
You should know your broker, as he is the main person to whom you are dealing. Ask about him from some of the other dealers and customers. You should seek complete market information from your broker including the difference in bid and sale prices of the stocks. Ask him to provide his suggestions in writing and seek a second opinion about the recommendations he made.
You should know the nature of the stock on offer. Many times the initial public offers are more risky than other. You should invest your money after satisfying yourself from the various factors including the financial conditions and assets of the company. Sometimes you may lose a majority of your investment or your entire investment in a specific penny stocks if a careful and wise decision is not made.
Before making an investment in a specific penny stock, you may ask about your broker’s history including any disciplinary action taken against him or her from NASD. You can also seek additional information about your broker from your state office of SEC (Securities and Exchange Commission). If still you think that you have become a victim of fraud, our federal law has provisions of rights and remedies available to you. You can file a complaint at the Securities and Exchange Commission.
Although investment in every stock is risky, even then taking some precautionary steps you can avoid risk in penny stock up to a great extent. One of the major precautionary steps is avoid hurry and do thorough research before investing in penny stocks.
Is it a Good Idea to Invest in Penny Stocks?
There are so many different stock options out there, it’s almost impossible to keep them all straight. When investors desire to start out small in the stock market, they may hear that penny stocks are a good opportunity. There is no reliable and authentic information available for penny stocks. But, are they really?
It’s true that, for those traders wanting to put just in a little money in the market, penny stocks can be a good way to go. Shares are often bought fairly cheaply, and there is the hope of getting a big return for that small initial investment. This is why some investors are drawn to penny stocks. A small investment, a big return…it sounds perfect, right?
This does not mean that it’s always a good idea to invest in penny stocks. Yes, there is some potential to enjoy a large return. But penny stocks aren’t labeled a “high-risk investment” for nothing. There is also the potential that investors will lose their capital, their whole investment in fact. Why?
Because penny stocks trade very infrequently, and they don’t trade through the large and well-known stock exchange systems. Penny stocks are traded through different markets, making it hard to buy and sell them. When a stock is hard to sell, that often means that investors may get “stuck” with their stock – and that’s a position that many don’t want to be in. This is why penny stocks are risky, and a little dangerous.
While some investors may consider this type of trading exciting, it turns others away from penny stocks completely. How do you know when it’s a good idea to invest in penny stocks? The only person who can decide what to do with your money is you. When you trade in penny stocks, you get regular “progress reports,” so you know exactly what your stock is doing. This is the law, so if you invest and don’t get your reports then something is very seriously wrong with your investment. You should get regular updates regarding your investment, and when you invest in penny stocks you’ll want to watch them carefully. Because they trade so infrequently, investors in penny stocks have to be ready to make a move at a moment’s notice. Missing the window of opportunity could mean missing out on a big pay off.
If you like the risk and want to take a chance on a big return by putting up only a small initial investment, then penny stocks may be a good choice for you. There are some Internet scams concerning penny stocks, and many people receive spam e-mail on many penny stock investments. These emails are going to try and cheat you out of your money, so don’t trust all the penny stocks you see advertised. There are some totally legitimate penny stocks that investors may want to try, however, so don’t let spamming stop you. Take a look at different penny stocks on your own before deciding what to do. If you feel comfortable with your chances and like what you hear about penny stocks, then it’s a good idea for you to invest.
For those of you who actively trade (or desire to learn how to trade) the financial and futures markets, there are a lot of other things outside the stock market you should be following. But, I guess my bigger message is for those of you that aren’t in the futures markets, whether you trade them or not, the futures markets have big impact on what happens in other financial markets, including forex, options and stocks. That’s why you should soak up every piece of good trading knowledge like a sponge in a quest to clearly see the bigger picture.
But remember, you’re the only one who can make that decision. If you like the sound of penny stocks, then find out more. But if you don’t want to take the chance, then you may not want to play the penny stock game at all.
Advantage in Trading Penny Stocks
There are advantages or disadvantages with any of the stocks and similarly penny stocks have some advantages and disadvantages. Although the main disadvantage with penny stock is the risk factor associated with it, penny stocks have a number of advantages. Some of the advantages have been mentioned below.
Advantage in trading penny stocks is that a small and careful investment in penny stocks can bring a high amount of profit. A thorough research about the company offering penny stocks and the companies financial factors can give an idea about the company and prospects of its penny stocks for future. However, for getting the maximum advantage and profit from the penny stocks, you should evaluate and think twice before putting your hard earned money into the market. This is one of the market where you may not get the authentic and reliable information and you will have to search the right stocks that can give you profit in the long run. There are a number of people involved in trading in the over the counter market and some lose and other gain.
You can learn patience and make money from the penny stock market, however you should remember that you should not make any hurry. You should be patient, although you may get lot of misleading statements from brokers or dealers, but avoiding hurry and taking an advice from another operator will benefit you.
Another advantage is that you have lot of opportunities that too in pennies in this market. You should look for the several stocks instead of looking for a single stock. You should also make comparison between stocks and on the basis of various factors including financial factors should decide about the specific stocks. Financial factors such as profit, revenue, and profit equity ratio are important for deciding in favor of a particular penny stock.
Now a days online booking and sales of stocks can be advantageous and you can come to a decision in time and at the same time you can look for the other vital parameters including financial parameter of the company. You can monitor your portfolios online and you can see the stock rates online at the website of pink sheets.
With these simple steps, you can gain a good amount from this market, however you should remember that the penny stocks market is not a quick rich type of market. Your intelligence and look for all the options before investing in a particular penny stocks can be beneficial for not only in terms of money but you can also gain expertise in the area.
There are numerous advantages in penny stock trading. A lot of opportunities are available in penny stocks if right steps are taken. By through examining the available stocks in the same group, you can arrive at a conclusion in favor of specific stocks on the basis of its performance and financial indicators.
Learning More About Penny Stocks
There’s so much information out there on different stocks, and advice on how to play the stock market. But which advice do you trust, and how do you know that you’re getting good advice? When it comes to learning more about penny stocks, do you know where to start?
Finding out what penny stocks are, and how to trade in them, is the first step in trading penny stocks. After all, if you’re going to invest you want to know what you’re investing in and the best way to do it, right? This only makes sense. But many investors want to learn all they can about stocks and stock market trading , before they invest their valuable money – and their time, which is sometimes even more valuable than any amount of money.
So how do you go about learning more about trading in penny stocks? A good place to start is the Internet, and not those spam email about penny stocks – never trust those. But there is valuable information to be found online, and knowledgeable people who will answer any questions you may have. The Internet can always be a valuable source of information on any topic – as long as you remember not to trust everything you read you find online. It’s always good to double and triple check any facts you unearth online, just to be on the safe side.
But for chatting with others and learning public opinion, there is no better forum. And isn’t talking to fellow investors the best way to learn about investing? Those who have played the market using penny stocks are the people who will be able to offer you the best information and advice. They can tell you what they did, and perhaps even answer questions.
You’ll find online forums, chat groups, discussion boards, and entire sites dedicated to investing in all kinds of stocks. You may even be able to find some penny stock-dedicated forums and groups, where you can learn about the stock type that most interests you. This is a great way to find out what real people are saying about their stocks, and if they’re actually making any money with them. Some people may brag about huge returns and this sort of information should perhaps be taken with a grain of salt, unless stock numbers seem to match their claims. As you talk with people and learn more, you’ll become more and more familiar with the penny stocks of your choice.
After all, it’s not like you can just take your broker’s word for it. When it comes to your money, you should learn all you can about where you’re investing and what you’re investing into. The Internet is a great source of information, and you can look up penny stocks and penny stock information online as well as chat with other investors. There may be some false information, but there is a lot of really good information – and the only way to find it is to look. Talk to others, and learn more about penny stocks before you invest. It may help you may bigger profits and enjoy bigger returns, as a result.