Basics of Penny Stock Trading

According to the Securities & Exchange-Commission (SEC), penny stocks are stocks whose value is less than $5 per share. In the stock market most investors consider penny stocks to be those stocks which trade under $1 per share. Even though the exact definition can be broad, the most recognized definition used is that penny stocks are low priced shares which are traded outside established stock markets.

Benefits of Penny Stocks
Micro-cap stocks have the potential of offering significant returns on your investment in a very short period of time. For instance, let’s assume a certain stock trades at fifty cents per share – the next day this same stock manages to receive a gain of forty cents. This means that this particular unit has nearly doubled its value and the investor who owns the stock has realized a gain of almost 100% return. Such cycles are common and they can be experienced in very short periods of time. Unfortunately it is also very possible for a penny stock to decrease in value at the same rate. This clearly depicts the volatile nature of these stocks and it is the main reason why most investors consider penny stock indexes as alternatives to their day trading.

Penny stocks can be very profitable

Without a doubt penny stocks are susceptible to a lot of risk. Nevertheless, they also have a very high potential for large cans which can bring in significant reward to shrewd traders since they own a much large portion of a publicly traded company. For instance, traders who hold $10,000 in cash are able to control 5,000 shares of stock worth $2 a unit compared to a major stock market which might require $250,000 to control the same 5000 shares worth of stock.

Where to Buy Penny Stocks
Penny stocks are usually traded on the over the counter (OTC) market as opposed to traditional major stock exchange markets such as NYSE, NASDAQ, and AMEX. Penny stock traders may also conduct their trades through pink sheets which are basically daily quotations of bid and ask prices from the National Quotation Bureau. In America the OTC market is owned and operated by NASDAQ which works under various sets of rules.

When deciding where to purchase penny stocks, it’s important to know that pink sheets stocks are not necessarily listed on major exchanges nor are companies compelled to provide full financial disclosures to prospective investors. This is mainly because most of these organizations are still very small and tightly controlled with very little amount of stock to trade under. It is due to such lack of financial data that pink sheets are perceived to be very risky. However, there have also been investors who have incredibly succeeded with Pink sheets.

In order to be a successful penny stock trader, an investor must possess vast knowledge of the markets and be extremely disciplined in their trades. These stocks hold great potential for profit but in reality only a few skyrocket in price.  In actuality, the majority of micro caps eventually lose all their value which makes mitigating this risk through the use of stop losses and limiting your exposure all the more vital.