What Are Penny Stocks?
The biggest companies on the stock market didn't start off that successful. Most of them started off as penny stock, which are stocks that trade for under $5 on a special market known as the penny stock market.
The world of penny stocks is unpredictable. The potential gains to be made from trading in penny stocks are only matched by the potential losses. Trading in penny stocks takes skilled knowledge of how the market works and it rarely gets the kind of media attention that more established stocks get. The little media attention that the penny stocks market gets is based on the high volume of scammers involved in it.
Wise traders use the relative lack of knowledge about penny stocks to their advantage. Use this guide of investing in penny stocks 101 to find out what penny stocks are and the inside of how penny stocks work.
How To Invest In Penny Stocks
Penny stocks are bought the same way that any other stocks would be bought; through stockbrokers. Low-priced stocks may not be referred to as penny stocks on NASDAQ or the NYSE. However, they are virtually the same thing. The downside to having to work with stock exchanges is that they have strict rules that must be followed which do not offer returns that are high as the exchanges that specialize in penny stocks. The best exchanges for dealing in penny stocks are Pinks Sheets and OTCBB.
These two exchanges offer similar services with a few differences.
Pink Sheets only offers quotations. They show listings of the available stocks however you will have to buy the stocks on your own from another exchange. It is not regulated by the SEC therefore buying penny stocks using Pink Sheets is considered to be risky. OTCBB on the other hand has a list of requirements for listings which is why it is more trusted however they are more lax than regular exchanges.
Benefits and Drawbacks Of Trading In Penny Stocks
The prices of penny stocks fluctuate wildly. Some traders have gotten lucky and invested in stocks that have multiplied in value by up to 100 times in two weeks. Such occurrences are rare but it is known to happen. The catch is in knowing which penny stocks to invest in.
Liquidity problems are the main thing that plague penny stock traders. They are typically hard to sell and usually don't do well. This means that buying a lot of penny stocks may leave you with a stockpile of useless stock that you can't offload which is a real problem if you were scammed into buying useless stock.
OTCBB makes sure that all of the companies listed on its trading platform follow the SEC rules however they are not as rigorous in how they check. The requirements that they insist their listed companies must stick to are considered to be minimum requirements that are easy to get around. Scammers love how lax these requirements are which adds another factor of risk to trading in penny stocks.
SEC (U.S. Securities and Exchange Commission) goes to such great lengths to protect the public from scammers in the stock trading market. However, there is only so much that they can do. Too much control in the penny stock market would make it impossible to trade in them which is why they still allow it to happen with such limited regulation.
Brokers are legally required to give their clients a document that details all of the risks associated with penny stocks before they allow you to trade them. You have to know the risks involved so that you are better at avoiding scams.
Watch Out For The Scammers and How To Play The Stock
One of the favorite tactics employed by the scammers of penny stock trading is spam. They fill message boards, email accounts and chat rooms with praise for obscure stock. Some people, those who don't know what penny stocks are, are unfortunate enough to fall for this ploy which makes people generally wary of buying penny stocks even though it is a legitimate market.
Another favorite ploy that is used by scammers is what is called a pump and dump. The scammers buy up a stockpile of worthless stock. With such an increase in demand for stock that previously couldn't be moved, the value of the stock rises sharply. Potential investors see this sharp rise and believe that the stock is rising organically. They buy in hoping to have a stake in this hot stock and are left with something worthless.
The best way to make money on the penny stock market is to know how penny stocks work. Do as much research as you can by reading financial reports and the business models of the stock that you want to buy.
The company's business model is the most important thing that you read up on when investing in penny stocks. By looking into the company's business model you can identify which ones are actually shell companies that scammers love to use for their unsavory operations. Look instead for companies that have genuine business operations and you can have faith that it is a legitimate penny stock to invest in.
You'll know that the company is legitimate depending on the quality of its financial statements, their auditors and whether their financials look promising.
You can minimize your risks when every decision you make is informed and prudent. And you can only do that when you've got the skills and the knowledge. Acquire both through one of Jason Bond's Trading Programs, which have been verified to deliver results to thousands of traders all throughout America. Learn more here.
Trading in penny stocks is riddled with risks. You never know whether the stock that you are buying is legit and even then you cannot be sure that it will perform well or leave you holding onto a pile of stock that you can't sell. The only way to be successful in the penny stocks market is to be have intimate knowledge of the best practices and how it works.
Penny stocks requires savvy business minds who have mastered the basics of investing in penny stocks. They are the brave few who have taken on the risk stand to bring in impressive returns. That is how to invest in penny stocks