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Trading Penny Stocks: How I turned $ into $k in less than 8 weeks
Unfortunately, some investors believe that finding the next "big thing" means scouring through penny stocks in the hope of finding the next Microsoft or Wal-Mart. Unfortunately, this strategy will prove to be unsuccessful in most cases. Read on to find out why pinning your hopes on penny stocks could leave you penniless. The terms "penny stocks" and " micro-cap stocks" can be used interchangeably. Technically, micro-cap stocks are classified as such based on their market capitalizations , while penny stocks are looked at in terms of their price.
We consider any stock that is trading on the pink sheets or over-the-counter bulletin board OTCBB to be a penny stock. Still want to trade penny stocks?Live Day Trading - $300 in 2 Minutes
Check out which online broker offers the best research tools here. What makes penny stocks risky?
Four major factors make these securities riskier than blue chip stocks. The key to any successful investment strategy is acquiring enough tangible information to make informed decisions.
For micro-cap stocks, information is much more difficult to find. Companies listed on the pink sheets are not required to file with the Securities and Exchange Commission SEC and are thus not as publicly scrutinized or regulated as the stocks represented on the New York Stock Exchange and the Nasdaq.
Furthermore, much of the information available about micro-cap stocks is not from credible sources. Stocks on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange.
Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on one of the major exchanges , the company moves to one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no such requirement.
Minimum standards act as a safety cushion for some investors and as a benchmark for some companies. Many of the companies considered to be micro-cap stocks are either newly formed or approaching bankruptcy.
These companies will generally have poor track records or none at all. As you can imagine, this lack of historical information makes it difficult to determine a stock's potential. When stocks don't have much liquidity , two problems arise: If there is a low level of liquidity, it may be hard to find a buyer for a particular stock , and you may be required to lower your price until it is considered attractive to another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate stock prices, which is done in many different ways - the easiest is to buy large amounts of stock, hype it up and then sell it after other investors find it attractive also known as pump and dump.
Penny stocks have been a thorn in the side of the SEC for some time because lack of available information and poor liquidity make micro-cap stocks an easy target for fraudsters. There are many scams used to separate investors from their money. The most common include:. Some micro-cap companies pay individuals to recommend the company stock in different media, such as newsletters, financial television and radio shows.
You may receive spam email trying to persuade you to purchase particular stock. All emails, postings and recommendations of that kind should be taken with a grain of salt. Look to see if the issuers of the recommendations are being paid for their services as this is a giveaway of a bad investment.
Also, make sure that any press releases aren't given falsely by people looking to influence the price of a stock. Under regulation S, the SEC permits companies selling stock outside the U.
These companies will typically sell the stock at a discount to offshore brokers who, in turn, sell them back to U. By cold calling a list of potential investors investors with enough money to buy a particular stock and providing attractive information, these dishonest brokers will use high-pressure " boiler room " sales tactics to persuade investors to purchase stock.
Two common fallacies pertaining to penny stocks are that many of today's stocks were once penny stocks and that there is a positive correlation between the number of stocks a person owns and his or her returns. Investors who have fallen into the trap of the first fallacy believe Wal-Mart, Microsoft and many other large companies were once penny stocks that have appreciated to high dollar values.
Many investors make this mistake because they are looking at the "adjusted stock price," which takes into account all stock splits. Rather than starting at a low market price , these companies actually started high, continually rising until they needed to be split. The second reason that many investors may be attracted to penny stocks is the notion that there is more room for appreciation and more opportunity to own more stock.
Unfortunately, people tend to see only the upside of penny stocks, while forgetting about the downside. A ten cent stock can just as easily go down by five cents and lose half its value. Most often, these stocks do not succeed, and there is a high probability that you will lose your entire investment.
Sure, some companies on the OTCBB and pink sheets might be good quality, and many OTCBB companies are working extremely hard to make their way up to the more reputable Nasdaq and NYSE. However, there are good stock opportunities out there that aren't trading for pennies. Penny stocks aren't a lost cause, but they are very high-risk investments that aren't suitable for all investors. If you can't resist the lure of micro caps, make sure you do extensive research and understand what you are getting into.
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Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. The Lowdown On Penny Stocks By Investopedia Staff Share. Penny Stocks The terms "penny stocks" and " micro-cap stocks" can be used interchangeably.
A Fortune for a Penny? Lack of Information Available to the Public The key to any successful investment strategy is acquiring enough tangible information to make informed decisions. No Minimum Standards Stocks on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange.
Lack of History Many of the companies considered to be micro-cap stocks are either newly formed or approaching bankruptcy. Liquidity When stocks don't have much liquidity , two problems arise: Penny-Baited Traps Penny stocks have been a thorn in the side of the SEC for some time because lack of available information and poor liquidity make micro-cap stocks an easy target for fraudsters.
The most common include: Biased Recommendations Some micro-cap companies pay individuals to recommend the company stock in different media, such as newsletters, financial television and radio shows. Offshore Brokers Under regulation S, the SEC permits companies selling stock outside the U.
What is a boiler room operation? The Penny Stock Fallacy Two common fallacies pertaining to penny stocks are that many of today's stocks were once penny stocks and that there is a positive correlation between the number of stocks a person owns and his or her returns.
The Bottom Line Sure, some companies on the OTCBB and pink sheets might be good quality, and many OTCBB companies are working extremely hard to make their way up to the more reputable Nasdaq and NYSE.
Penny stocks are speculative and highly risky investments. Lack of government and stock exchange oversight and general information leaves penny stock investors open to sudden losses.
Is the lure of finding a diamond in the rough too strong to ignore? Then here's a guide to investing in penny stocks.
How to Pick and Trade Penny Stocks: 13 Steps (with Pictures)
Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
Learn more about penny stock trading and forex market trading, and why each investment class appeals to different types of investors. Penny stocks are like a house of cards: Welcome to the wild world of penny stocks. Here's what to expect. Penny stocks are highly speculative and very risky for many reasons, including their lack of liquidity and small market capitalization. Given adequate financial disclosure, investors can use some of the same financial ratios for valuing blue chip stocks to evaluate penny stocks.
While in the same asset class, emerging market stocks and US penny stocks have significant differences that can impact your portfolio. While investing in penny stocks is risky, it can sometimes be lucrative. Discover more about penny stocks, how they can be bought utilizing an individual retirement account and the risks penny stock Determine whether to invest in penny stocks or large-cap stocks for retirement.
Penny stocks are extremely speculative while Learn more about penny and blue-chip stocks, why it may be a bad idea to invest in penny stocks and why blue-chip stocks An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.
A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.
A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers.