Everything You Need To Know About Penny Stocks

Everything You Need To Know About Penny Stocks

This Penny Stocks Guide will help you understand everything you need to know about penny stocks. Penny stocks are traded outside major market exchanges for a significantly low price and thus have a small market capitalization. Because of its volatile nature, these stocks offer high risk. However, it also means that you can generate more money in a relatively short span of time. Penny stocks are often traded over the counter using pink sheets or OTC Bulletin Board.

Penny stocks are a more appropriate choice for investors who can tolerate a high risk. The higher levels of risk mean investors should take necessary precautions before making a big move. For instance, investors must have a stop-loss order predetermined before becoming a part of the trade. This way, they will know what to know in case the market does not move according to their intended direction.

Penny Stocks Guide

While penny stocks offer many opportunities to make good money, you need to have realistic expectations. Keeping your expectations in check is important is because stock market gains can take months and years to materialize. If you’re a beginner, it’s imperative you have realistic goals for your investment.

What Is Over The Counter Trading?

Over the Counter (OTC) trading is when stocks are traded using a dealer as opposed to the centralized exchange. OTC does not involve formal exchanges including NYSE MKT, Toronto Stock Exchange, and New York Stock Exchange.

What Are Popular OTC Networks

Popular OTC market groups have some well-known networks including

  • Pink Open Market
  • OTCQB Venture Market
  • OTCQX Best Market

These markets feature unlisted stocks traded on pink sheets or OTCBB. NASDAQ operates using a dealer network. However, NASDAQ is not categorized as OTC because it is a stock exchange.

Why Should You Trade Penny Stocks?

Here are some of the most important reasons why you should trade penny stocks:

Chances Of Potential Growth

While they may be difficult to fine, some penny stock companies offer profitable return and an excellent opportunity for you to diversify your earnings. Some of these companies start as penny stocks but then grow to become mid-cap or large-cap stocks, resulting in incredible gains for early investors.

Penny Stocks Guide

However, similar to buying any stock, you must remember to perform due diligence before making a final decision. This process involves reading cash flow and income statements to determine how profitable the company is.  It is also advised you check the balance sheets to analyze the company’s assets versus debts. This exercise will help you separate legitimate companies from scams.

Penny Stocks Require Less Capital

Penny stocks don’t require you to invest in a lot of capital. Penny stocks are a great way to earn more if you are on a limited budget and don’t have much capital. Depending on how much money you’re willing to pool in, you can start between anywhere from $500 to $2,000. However, it is worth considering that day trading requires several transactions.

Greater Return

Since penny stocks are in their growth phase, companies that offer them have significant room for improvement. Therefore, you can expect the value of penny stocks to rise.

This opportunity means that some penny stocks may have a higher return potential compared to other high-priced stocks from established companies. This makes it possible for traders to double their earnings very easily with penny stocks.

Diversifies Portfolio

Typically, most finance professionals and experts consider stocks as long-term investment options. These experts usually emphasize the importance of a diverse and well-allocated portfolio, which provides you the freedom of allocating money over different investments.

Penny Stocks Guide

On the other hand, penny stocks are subject to change and are a short term investment. Trading penny stocks give you the opportunity to increase liquidity, allowing you to diversify your portfolio.

What Are Some Common Risks Connected With Penny Stocks?

Before you pool in all of your savings, here are some of the major risks commonly associated with penny stocks:

Manipulation Of Prices

It’s worth noting that penny stock prices are fairly easy to manipulate because of the low volume of shares traded every day along with low prices. This process causes penny stocks to become candidates for a pump and dump scheme.

This is when people send out emails and newsletters to ‘pump’ up promotions and attract investors. Once the price of the stock rises, the pumper sells out completely, leaving the remaining investors with no support.

Exchanges Are Not Regulated

Unlike other types of stocks, penny stocks are available over the counter through pink sheets or on OTCBB. Since the stocks are unregulated, they are not forced to comply with rules and regulations.

Pink Sheet Stock Options

This step may result in unseen risks for penny stock traders since it has greater chances of exposure to different types of scams and manipulation.

Lack Of Financial Statements

Wise and experienced investors know the importance of checking financial statements of a company before investing in stocks. This process involves evaluating income statements and balance sheets to make future predictions.

Unfortunately, you may not be offered this luxury with penny stocks since there might not be any records or financials to observe. In short, you may not have access to hard data that will allow you to analyze or predict the results of your investment.

Precautionary Measures To Avoid Scam

Now that we have discussed the potential risks of penny stocks; let’s discuss how you can avoid such situations.  Follow these simple guidelines:

Learn How To Differentiate Blatant Promotion And Research

It’s no secret that promoters frequently hire copywriters to create flattering reports about their company stocks. Most of these writers do an excellent job in making a convincing case by using deliberate distortion, hyperbole, and other tactics to lure investments.

Most of these copies are formatted to look like research reports to convince potential investors. Before you become serious penny stock trader, it is important you determine a good eye that will help you distinguish between legitimate equity research and promotion.

Investing in Penny Stocks

One way to make a more informed decision is to read the report carefully and the disclosure section towards the end. This step will help determine whether the research is an actual research report or an advertisement.

Determine The Credibility Of The Company’s Management

The success of company rests on the quality of its management; this makes penny stock companies no different. While you may not find many credible names, it’s worth delving into the management’s track records to examine whether the company directors or executives have experienced failures or successes or is undergoing any legal issues.

Check The Financials

While penny stock companies don’t provide in-depth financial information, a little extra research won’t hurt. Keep an eye on all the financial statements released by the company. Also, analyze the balance sheet to determine whether the company has any substantial liabilities or debt. If the company has experienced a huge growth, it is a promising sign.

Penny Stock Regulation

All penny stock brokers and traders that deal with penny stocks are required to warn their clients of the risks involved.  These stocks are of under $5 hence brokers must show how much they are getting for penny stocks, despite any corruption.

According to the SEC rules, traders must make it clear that penny stocks should be precisely pried and traded occasionally. While penny stock offers high rewards, it also comes with many risks.

Regulations and Rules

It’s worth noting that the penny stock trade has advanced throughout the years. Today, penny stocks don’t cost less than a $1 and now include shares that trade below $5.

When Is A Penny Stock Not A Penny Stock Anymore?

Multiple events can cause penny stocks to transition into regular stock. Several events can lead to this transition. For instance, this can happen if the company registers its securities with a regulatory body or if the SEC registers the new securities.

Both of these steps require the firm to adhere to rules and regulations including providing disclosures to investors about company management, financial conditions, and business activities. The filings also command Form 8-K reports, 10-Q quarterly reports and Form 10-K reports, providing a detailed account of events.

In some conditions, the company will have with file reports to the SEC based on other reasons. Filing these reports is crucial if the company has more than 2000 investors or over 500 investors, which cannot be called accredited investors, possessing $10 million in assets.

If the company lists national security exchanges and SEC registrations, it will have to file as well. Additionally, SEC registration becomes mandatory if the securities list under OTCBB.

5 Things To Remember When Trading Penny Stocks

With all the risks associated with penny stocks, here are a couple of important things you need to keep in mind before trading penny stocks:

Identify Spikes

If you’re a beginner and don’t know which stocks to buy, the best way to generate profit is by identifying a spike and piggyback on a stock that is already moving. This option is much better compared to simply sitting around, waiting for sudden breakouts. You can also choose from a plethora of research tools to help you make the right decision.

Spike in penny stocks follow it

For this reason, it is a good idea you invest in a coach so that you can receive alerts and keep track of what other people are doing. Most coaches have group chats that also provide you the opportunity to mingle with other people and find out what stocks are doing well.

Consider Volume And Trading Restrictions

When choosing a penny stock, it is essential you analyze the volumes of everyday trades. According to experts, investors must only invest in penny stocks which trade greater than 500,000 shares every day.

If the number of shares is anything less than that, you must be concerned about liquidity. According to penny stock guru, Timothy Sykes, who earns a whopping profit of about $4 million in penny stocks, you must not invest in stocks more than its 10% trade volume. Making a larger investment could lead to a costly outcome.

Start Paper Trading

Penny stock trading is all about being patient so consider starting with paper trading. Now, you’re probably wondering why you spend time on paper trading when you can earn money penny stocks.

But the truth is, you’re probably going to make many mistakes at the beginning. These mistakes are quite common when you are new to trading or are a new investor. So, unless you are clear about the rules of the penny stock game, paper trading is the way to go.  Paper trading is like trading imaginary money.

Write down your trades paper trading

This process will provide you the opportunity to learn everything you need to know without risking real money. You will also be able to refine your strategy and collect information about reliable sources.

Call The Company

If you have any questions it is essential you call up the company.  Almost all publicly trading companies are required to provide their investors information about stocks including information about potential shareholders. If you’re interested in a particular company, call them up and ask to speak to the investor relations persons.

The representative will be happy to answer any questions which you may have. Research is important if you want to gain maximum profit. By putting in a little more effort, you’ll gain more clarity about the investments you want to make.

Learn Never To Look Back

It can be agonizing to sell a stock and then watch as climbs higher over the next months. As upsetting as it may be, learn never to look back. Once you have made a decision, learn to stick to it and move on to another stock.

Characteristics Of Successful Penny Stock Traders

It’s important to understand that penny stocks differ from larger, more profitable blue-chip stocks and large equities. This reason is why you’ll need to adopt a special mindset when dealing with low-priced shares. Effective penny stock traders adopt the following characteristics:

Adopt Realistic Expectations

If you want to become a successful penny stock trader, it is essential you adopt realistic expectations from the very beginning. A hasty attitude will cause you to lose big money.

Realistic Expectations for Stocks

Experienced traders can predict what they can accomplish with each investment and learn from their mistakes. Understand that while it’s good to be impulsive, you should put enough thought to make the right decision.

Don’t Be Overly Loyal To The Same Company

Successful penny stock investors are not overly loyal to the same company and think of their shares are stepping stones to profit – that’s it. To be a successful trader, you’ll need to be firm and quick to cut out losing positions.

So don’t pin all of your hopes on the same penny stock. Diversify your portfolio and experiment with different companies. Pooling all of your funds in the same place can be risky so understand the importance of underlying shares.

Must Have A High Tolerance For Risks

While trading stocks can offer explosive stocks because of its smaller investment, it also comes with great results. Penny stocks aren’t for the faint-hearted and come with high risks, so be prepared for setbacks.

Be Patient

If you want to earn huge gains for penny stocks, you’ll have to be patient. Patience is important because the best companies take a long time to become discovered.

Patience is key

These companies move upwards and start producing better quarterly results. However, since many people don’t buy penny stocks, it may take a while for it to be discovered by mainstream investors.

Understand The Volatile Nature Of Penny Stocks

As discussed earlier, penny stocks are volatile which means that incredibly high prices can suffer an extreme downfall if you’re not careful. However, low priced shares can also leap dramatically high. As you become proficient, you should develop good instincts. These instincts will help you make good entry or exist.

Learn To Make Decisions Based On Research

Being impulsive may be a good trait but not when a bad decision can cause you to lose hundreds of dollars. Conduct proper research before deciding to avoid any substantial losses.

Monitor Companies On A Regular Basis

If you want to become a successful penny stock trader, you’ll have to monitor different companies at the same time. Keen investors know how to adapt and adjust to the surrounding changes without any problems.

Monitor Your Stocks

Where To Get Information About Penny Stocks And Their Movement?

Do your best to avoid falling into the trap of promotions. If you want to gain information of stocks, you’ll have better luck reading sites such as Google Finance and Business Week where experienced financial experts share their personal experiences on penny stocks.

Reading articles from reputable sites is a more reliable solution since the authors are not paid to endorse or specific company. You can also subscribe to the leading financial magazines to learn about new companies. Some other tips include:

Seek Help From An Advisor

Consider seeking help from a financial advisor who is an expert on penny stocks. However, most advisors consider investing in penny stocks too risky and may advise against it because of the risks associated with it.

Advisors for Stocks

Find someone who doesn’t mind working with you. Make the best out of it as they will provide you with expert guidance and financial information on companies.

Invest In A Penny Stock Coach Or Guide

Consider investing in a penny stock coach or system. One on one coaching can be especially beneficial for beginners who are in search of proper guidance.  Opt for coaches that offer multiple resources. Some coaches also let you subscribe to alerts so that you receive notifications about the penny stocks that are doing well.

Signing up for a trading program may seem expensive at first (be prepared, it might cost you a few hundred dollars). However, in the long run, it will shorten your learning experience, ensuring you don’t make the same mistakes as your mentors.

Conclusion

If you’re a beginner, it is essential you rely on a reputable penny stock coach or guru who can guide you through the process. Most promoters use improved tactics to lure investments. These scams involve sophisticated execution and craft, with plenty of perfection. While these tactics may not exactly be illegal but they might trick you into making a risky decision.

It takes years to differentiate a good opportunity from a scam. So, beware of the pump and dump scheme and take necessary measures to equip yourself. Also, note that you can report all illegal scams and promotions to the SEC.

If you’re in search of the best penny stock coach or guide, don’t forget to check out our detailed buying guide that will help you make the right decision. But most importantly, keep in mind that penny stock trading isn’t for the faint of heart.

You not only have to be cunning but must have a high tolerance for risks. However, conducting thorough research and performing due diligence can help you make quite a profit. Use these tips to boost your chances of success.

Resources:

Wikipedia

TheBalance

Forbes

Huffington Post

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