Penny stocks are no easy matter.
Penny stock trading is the trading of commons stocks that are sold for less than one to five dollars for each share. Penny stocks are also known as micro cap (or nano) stocks which normally trade for under five dollars per share.
Penny stock trading takes place on the Over the Counter Bulletin Board (OTCBB) or the Pink Sheets, and therefore penny stocks are also referred to as over the counter stocks. These smaller stocks are typically offered by smaller struggling companies or newer companies. They haven’t proved that they are stable enough to move to the larger stock exchanges such as the New York Stock Exchange. Penny stocks are determined by their share price, per the SEC, and not their market capitalization or listing service.
Penny stock trading can be riskier than trading regular stocks and should therefore be treated as seriously as trading regular stocks found on the NYSE. When penny stock investing, it is important to note that there are four disadvantages to investing in this type of stock.
First, there is a lack of background of the companies traded in these small amounts. These companies have little business history or could potentially have a very negative business history. Before you begin to trade penny stocks, you must research each company to determine their potential. If the company is not headed is a good direction, then you won’t make any money by buying shares in the company.
Second, there is limited information regarding the company’s financial status when penny stock trading. It is hard to research each company because the OTCBB and Pink Sheets do not have the same strict reporting requirements as the major stock exchanges. Without this valuable information, it is very difficult for investors to invest wisely, especially if they don’t take the time to research.
Third, most penny stocks are illiquid. This is due to the fact that there is no interest in the future potential of the stocks which leads to lower share prices.
Lastly, penny stock trading has tax consequences for day traders. For investors who are day trading penny stocks, it pays to work with a tax specialist to ensure awareness of the tax consequences and benefits involved.
Investors new to penny stock trading will find it beneficial to practice online paper trading before trading with real money. Paper trading is a great way to find out whether or not a particular system is right for you without finding out with real money! It is definitely possible to make a nice living investing in penny stocks of small or future businesses, but you must be sure that you find reliable resources and tools for building your list of penny stocks to watch.
Once you understand what to look for in a small company, you can begin to trade with real money instead of paper trading. Just be sure not to fall for hot penny stock scams where manipulative investors pump and dump stocks! Rely on your sources and judgment and invest in companies that you believe are a sound investment.