Introduction
We've all heard the claims made by the proponents of penny stocks; "My stock has doubled overnight," "I've realized a 1000% gain on investment over the last 6 months," "My stock gained 30% in one day!"
Although we have heard these claims, can we be certain they are true? Often we attribute greater veracity to the horror stories we hear about penny stocks; "I lost everything in just 24 hours," "My investments have lost 85% of their value in the last 6 months," "I've been wiped out," "I lost all my retirement savings."
Somehow we give more credence to the horror stories than to the stories with a more positive ending. But what is the truth? Can penny stocks make us rich? How volatile are they? What are the risk factors involved in trading with penny stocks? This article wil answer some of these questions.
Approximately 95% of all investors in penny stock lose money. Obviously then, before you invest in penny stock, you need to arm yourself with tools including education, knowledge and research.
What Is a Penny Stock?
Traditionally, a penny stock is any stock traded at a price of $1 or less. By definition, a penny stock is any stock traded at $5 or less. Some people consider any stock traded over the counter (OTC) or on the Pink Sheets as a penny stock although these stocks can exhibit a price range from a few pennies (or less) to over $60.
Penny stocks are the shares of a company which have low or limited daily volume, often exhibit a lack of corporate transparency (thereby making research into the company difficult) and may possess other factors which make it difficulty to objectively assess the company issuing the penny stock under consideration.
How Penny Stocks Work
Penny stocks are bought and sold generally in the same manner as any other stock. By opening an account with a broker, you just need to fund your account and then begin trading. A penny stock is low due to many factors the primary one being that the company is small with limited operating history and/or limited financial data.
Benefits of Penny Stocks
"Penny stocks can make you rich!" Well, no, probably not. A prudent investing and exit strategy with penny stock may enhance your wealth, but riches are probably far beyond the scope of any casual investor in penny stock. Although we often hear these outrageous claims, most of us understand that they are only publicity and hype. When properly traded and when armed with a clear and definite plan that includes a purchase as well as an exit strategy, penny stocks can present the potential to dramatically enhance your portfolio. But penny stock should never represent more than 10% of your portfolio at any one time.
One of the benefits of investing in penny stock is the amount of accurate, free data available.
Obviously, perhaps the greatest benefit to trading in penny stocks is the opportunity to make dramatic changes in your wealth. Buying a penny stock at one cent and then seeing it rise to three cents may not seem like much on a dollar basis but as a percentage basis you have just tripled your money.
Another benefit of buying penny stock is the potential for becoming part of a big company before it becomes big. Who would not have wanted the opportunity to buy Apple when it was just a few dollars a share? The same type of opportunities may be available in today's penny stock market.
An additional benefit of investing in penny stock is the emotional high some people get when learning something new. Digging deeply into a market and analyzing the forces and companies in that market can be exciting.
Risks of Penny Stock
Penny stocks are often associated with high risk and this is a legitimate concern. Investing in a penny stock can produce big gains, but the losses often outweigh the gains for most investors.
With 95% of investors losing money in penny stocks, the odds of making a net return on investment are slim, but you can ameliorate this risk and increase your chance of making a gain with accurate information, knowledge, education and training.
Some penny stock newsletters, websites and advisors have created or participated in scams in which they will buy thousands or millions of shares at a wholesale price and then recommend that stock to their subscribers. As the stock price increases from the enhanced activity, the company makes a profit by selling its stock back to the market. This is illegal and the SEC has specific rules regulating this.
A government site contains rules regarding penny stocks. Go to the sec site penny stock rules for more information.
Education
Education is the key to successfully (and profitably) trading in penny stock. You need to know about the market of penny stocks and the process of trading, the industries, markets and companies involved with penny stocks and the primary investment advisors, newsletters and websites.
Acquiring the proper education is a requisite for limiting your exposure and reducing your downside. Websites, newsletters, advisors and other sources, both paid and free can all contribute to your education and knowledge about penny stocks.
Education Sources
There are many sources of valid information about penny stocks. As mentioned above, websites, newsletters and advisors can all contribute to your education and knowledge about the penny stock market. Many brokers also provide some information, training and education regarding penny stocks, but these vary widely in quality and usefulness. Please see their websites to determine which are the best for you.
Opening an Account
The easiest part of penny stock trading is opening an account. Many online brokers and traders are eager for your business and will provide help and assistance every step of the way. To open an account, simply choose the broker you feel is best for you, answer the few simple questions and provide the information required and then fund your account. Nothing could be simpler!
