Penny Stock – Understanding The Intricacies

Most penny stocks are shares of small companies that normally do not have great market penetration.The main difference between stocks and larger stocks is that they fluctuate enormously on a daily basis. When you decide to invest in the right small or large cap company, make sure you limit your order. While the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no such requirement. Minimum standards serve as a safety cushion for some investors and as a reference for some companies. Penny Stocks on the OTCBB and pink sheets don’t have to fulfill minimum standard requirements to remain on the exchange. Stocks aren’t present in the typical markets that most stocks in your portfolio might be, such as NASDAQ, NYSE and AMEX.

The SEC defines penny stocks accordingly: The term ‘penny stock’ generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they may also trade on securities exchanges, including foreign securities exchanges. In addition, stocks include the securities of certain private companies with no active trading market.

Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the operation and receive from the customer a written contract to the dealing. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer’s account.

Penny stocks may trade infrequently. This means that it may be hard to sell penny stock shares once you own them. Because it may be hard to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be established for the possibility that they may lose their whole investment.

Let’s Continue This Analysis

Since pennystocks are traded outside the main markets, there’s plenty more room for investment from experienced and inexperienced investors. Penny stocks really help you develop a better understanding of how the market works, from the very finite details and inner workers of the trading counters. Identify what type you wish to invest in small cap,, micro cap, or large cap companies. These terms relate to the quantity of capital each of the companies have, and is a great way to gauge new opportunities or growth patterns. There may serve as a good place for penny stocks in the portfolio of an experienced, advanced investor, however, if you follow these steps.

Have you ever heard the phrase ‘the trend is your friend ‘? Well, with trading penny stocks, identifying trends through technical analysis and buying and selling according to that trend, can turn out to be very profitable. Small cap stocks are loosely categorized companies with share prices of below $5 and with market caps of under $200 million. They are sometimes referred to as ‘the slot machines of the equity market’ as a result of the risks involved. In basic terms, with trend trading, you buy a stock when it is trending up and sell as soon as it reverses that trend or conversely when shorting the stock you short sell it when trending down and cover your position at the place it starts to recover.

Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information because the company is not required to have independently audited information and is never secured by a stock market analyst because virtually no one would read about it or be paid for the information.

In addition to finding penny stock tips, the Internet has also provided many avenues for the average penny stock trader to obtain penny stock tips and information about penny stock companies. Since the companies that are the focus of penny stock tips should be investigated prior to trading, it is important to find out where to find information about penny stock companies on the Internet.

Before I provide the websites and forums where most penny stock traders share their stock tips and information, a word of warning about penny stock trading is necessary (if you’re only interested in where to find penny stock tips on the Internet, then skip to the next chapter).

Penny stocks are inherently risky, much riskier than the New York Stock Exchange (NYSE) and NASDAQ stocks that many people are familiar with. Penny stocks are much riskier because they often represent companies that are found in the development stage and have no operating business, or companies that are operating but are very small and not well capitalized, or companies that are in fiscal difficulties. These precarious situations often lead penny stock companies to dilute the number of actions available to trade by authorizing additional shares and selling them into the open market. This is colloquially known as ‘printing shares”. Some traders characterize penny stocks as little more than share printing and merchandising operations. This is often but not always the case. Compounding this situation lies in the fact that information about the inner workings of penny stock companies is often hard to come by since a number of these companies aren’t under Security and Exchange Commission (SEC) requirements to disclose company information, due to their small size.

The bottom line is to be very careful when trading penny stocks. Keep in account the fact that the owners of the companies that penny stocks represent hold all the cards in the penny stock trading game, since they’re most always majority owners and fully control the shares of the companies and boards or directors. They make the decisions about selling additional penny stock shares into the market that may benefit themselves and other company insiders, but hurt those that hold penny stock shares. Money that one cannot afford to lose should never be used in order to trade penny stocks. For every 1, 000% penny stock gainer, there are tens of penny stocks that lose value, sometimes significantly and very quickly, as they’re diluted into oblivion.

Both Investors Hub and Silicon Investor can be viewed without a membership. However, participation in these websites is limited without a membership. It can be useful to have a membership, so you can ask questions about penny stock tips and about the stocks that you’re holding.

These are the most active penny stock trading boards on the Internet. If there are penny stock tips to be found, they can be made available on these boards. This is where to find penny stock tips on the Internet.

It is usually a very good idea to avoid penny stock tips that are received via e-mail. This is attributable to the fact that e-mailed penny stock tips are sent by pennystock promoters that have been paid by a penny stock company to promote their pennystock. It isn’t uncommon for penny stock companies to use the interest generated by e-mail promotions to sell additional stock, thus diluting the worth of their stock. By the time you get the e-mailed penny stock tip, any increase in price due to the advancement is likely to have played out, and the stock may quickly reverse direction and fall.

In the same vein, it isn’t a very good idea to chase a hot penny stock that has already taken a significant move to the top. Quick penny stock moves higher bring in great deal of penny stock momentum players, and although you might get lucky and catch some more of the upside momentum, you don’t wish to be holding the penny stock when the music stops and everyone is scrambling to sell. The selloffs in penny stocks can be brutal.

Be careful not to be learned in by the hype surrounding a particular penny stock. Every penny stock has long shareholders, its advocates, and sometimes paid promoters, that make wild claims about the potential upside of the pennystock that they’re holding or promoting. Due diligence is important when evaluating a penny stock. Do your research and discount the hype. If SEC filings are available for a penny stock you’re considering purchasing, then take the time to read them. Look for convertible debt deals in which money borrowed by the penny stock company can be converted into shares. Those types of deals usually lead to dilution and a lower stock price.

Keep in account the fact that the penny stocks that have failed miserably once had the same hype about their upside potential before they fell in value. Just look at their boards on Investors Hub to see what sort of hype and claims were being taken before their stock price collapsed.

The biggest difference between trading penny stocks and trading NYSE and NASDAQ stocks is that penny stocks are far more volatile. While NYSE and NASDAQ stocks sometimes make big moves on earnings or takeovers or mergers, penny stocks can gain or lose value much more rapidly than NYSE and NASDAQ stocks because they move on momentum. Because penny stocks are often thinly traded, only use limit orders to purchase or sell penny stocks. Otherwise, you may wind up buying or selling at prices that are far higher or less than you’re expecting.

Set your limits. Be prepared to sell quickly, if a penny stock trade isn’t working out. You may not get a second opportunity to sell at a price you’re comfortable selling at. It is better to lose 10% and still be found in the game to the search for a winner, than to be holding a penny stock that continues to drop in value. The key to the penny stock trading game is to maintain your trading capital and wait for the great 1, 000% gainer to fall into your lap. Do not wait for penny stocks to rebound, because it may represent a long time, if ever, before they rebound. Some penny stocks, even once high fliers, go to zero and lose all of their value. Stay in the game by preserving your trading capital.

Do your research, follow the penny stock tip boards, find posters who’ve good track records, and try to find a penny stock that is preparing to move higher. 1, 000% penny stock gainers aren’t common, but they do happen; which is why so many people take their chances trading pennystocks. Sometimes these small penny stock companies actually do have big developments, such as significant contracts with big well known companies or large sales gains. The risks in penny stocks are great. However, the rewards may likewise be great.

A good strategy for a newcomer to penny stock trading is to start following the penny stock trading boards and trade on paper, without using real money. Just note when you’d have brought the penny stock you’re interested in buying and how much you would arrange to have brought and pay for it, and then when you think it is time to sell, make a note of the price. See how you do on paper, and when you’re comfortable, start trading penny stocks with real money, but never just you can afford to lose. Penny stocks aren’t for retirement investing or investing for long term financial needs.

As penny stocks aren’t traded on the main markets, it’s important to find a trusted broker or side exchange market to facilitate the acquisition of stocks. In order to be really effective as an investor, you must understand the ‘bid and ask’ price connection. The difference between the bid (real) and ask (selling) price is referred to as spread and is the base in which you’ll calculate your earnings. This is particularly important as stocks are sold by estimated values versus a single unit price. It is wise to install a stop-loss tactic and protect your capital with prudent exit strategies. This is both high risk and high reward. So, it’s very important to find out what you are doing, and to hear the experts.

And therefore carries a higher risk than your average large stock investment, however, with the potential to make a great deal more money. For example, if a stock only cost 10 cents, a 1 penny increase would push a 10% gain.Typically, these types of stocks are sold for $5 or less, in most cases they are under a $1. Stocks aren’t present in the typical markets that most stocks in your portfolio might be, such as NASDAQ, NYSE and AMEX. Penny stocks are a great way of getting into the market at a low cost. And therefore, eliminates potential loss risks. The logic behind trading penny stocks is that they are far less expensive then their Blue Chip counter-parts.

When researching what stocks to invest in, it’s important to do your research. Make sure you hear what the company’s product is, and how it’s used in the marketplace. A limit trade limits the amount you will be paid for the stock or your selling price. If you are faced with a share that’s a penny, then even the slightest movement in price before you buy can cost you all your profit or throw you into a loss. Since activity may be low on these stocks, certain individuals can play with the price of the actions and increase their selling price.

In any case, if you are planning on buying stocks in bigger quantities, always make sure to go through a broker. They know the markets and are contained in charge of handling and selling, so it’s better to work with them to maximize opportunity. Sometimes, this is the reason why the stock is on one of the following exchanges. Once a company can no longer maintain its position on one of the leading exchanges, the company moves to either of these smaller exchanges. More often than not these companies are new or expanding their businesses and this market is a great avenue for investors to enter on the ground floor.

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