Before you can begin day trading penny stocks, you need to understand what exactly the term penny stock means. Query a collection of investors about the label of a stock trading under five dollars and they’ll provide several answers, including the labels penny stock, micro cap stock, or nano stock. For the most part, these three terms can be interchangeable.
For this page I’ll utilize both penny stocks and micro cap stocks, but while they can be used interchangeably, they do have slightly different meanings. Micro cap stocks are defined as such based on their market capitalization while penny stocks are defined by their specific price.
What To Consider
Either way, you need to understand that to buy penny stocks or micro cap stocks includes both potential reward… and great risk. Besides deciding whether you want to use a personal broker or try to find one of the best online brokers, there are other things to consider before buying penny stocks.
The primary goal of any profitable investment strategy is to acquire enough actionable, tangible data to make informed trades.
Pink sheet stocks and stocks on the OTCBB (Over-The-Counter-Bulletin-Board) don’t have to fulfill the minimum standard requirements to persist trading on the exchange. And sometimes this is why a particular stock is on one of these exchanges.
You’ll find a number of companies defined as micro cap stocks which are either brand new and unproven… or some which are heading towards bankruptcy.
The Potential Risk Of Buying Penny Stocks
Besides the obvious implications of a stock headed towards bankruptcy, why else are these stocks risky? You see, stocks that don’t have a decent range of liquidity present two core problems:
You may experience the possibility that the stock can’t be sold without drastically lowering its price.
And because of the low liquidity, these penny stocks are more vulnerable to market manipulation. What this means is that you can find stocks strategically hyped just to create a temporary, artificial spike in its value, during which those doing the hyping buy and sell before the spike disappears. This tactic is called “pump and dump.”
Pump and dump persists, ironically, because if you’re aware of the situation you can actually capitalize on someone else’s pump and dump. So despite it being a frowned-upon market manipulation, many investors not directly involved in the execution of the pump and dump still rely on the tactic to profit and create their own penny stock fortunes.
Broker Or Online Brokerage?
The market capitalization of a company, or the “market cap”, can be calculated in the following manner. First you multiply the penny stock price by the amount of outstanding shares. This process will help you determine the dollar value of all this company’s shares.
Most penny stock transactions will be charged by brokers as principle transactions. What this means is that the broker isn’t paid a commission but rather earns his or her pay on the spread. This requires buying and selling at the most advantageous times. Mastering a penny stock’s entry and exit points is pivotal to a broker’s success, which is incentive for them to help you earn the most from buying and selling these stocks.
While you can choose to trade penny stocks online or through brokerages, remember each of these approaches have advantages and disadvantages. Some people prefer to let the professional brokers handle their money. But with buying penny stocks you often need to act fast and thus you don’t have the time to phone your broker to sell now. This is why many people prefer to buy and sell penny stocks online through their own brokerage account._____________________________________