Defining Penny Stocks
Before we discuss how to invest in penny stocks, I’ll be defining penny stocks as stocks that are under $5 per share. Some others might use the cutoff of $10 or $1 but due to inflation, $5 is a very solid and reasonable cutoff to brand a stock the title of “penny stock” or not. Penny stocks are, by their nature, highly volatile investments. They are frequently seen in starting companies and other small and less-established companies.
Due to their cheap price per stock and their volatile nature, penny stocks are able to go up and down drastically with almost no forewarning leaving their investors either rich or out of money. This is an important thing to note as even the best investors will lose money playing the penny stock game. But such is the way the game is played, and all you need to do is win more than you lose to earn profit.
Another consequence of the fact that the stocks are at a cheap price per share is that they are commonly not traded on major exchanges such as the NYSE or NASDAQ. The way that they are traded then is by OTC. OTC stands for over-the-counter trading which, as its name implies, means that the stock is sold directly by the seller to the buyers, usually with a broker. However, in this guide, I’ll be focusing on how to invest in penny stocks without a broker.
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Additionally, an important thing to note about penny stocks is that they are not very liquid. Liquidity is a term used to describe the speed at which an asset can be quickly obtained without changing its value. The most liquid asset that exists is cash.
Finally, as a result of their volatile nature, penny stocks are more useful as short term investments as longer-term strategies just won’t work well with them. But that doesn’t necessarily mean that you can’t retire off the stocks, it’s that you would need to always check up and put effort into it.
Buying Penny Stocks Without a Broker
If you’re wondering how to get into penny stocks without using a live broker, as I assume since you opened this article, this means that you will need to use an online service instead. Some great sites that you can use are E-Trade and TD Ameritrade which can allow you to set up an account with a small deposit. You can later use this deposit to make purchases and pay off fees. A benefit of those sites is that they allow constant monitoring of stocks that could prove to have volatile price movements.
Some Helpful Tips and In Conclusion
A tip that you can use while buying penny stocks is to use “Limit” orders as opposed to “Market” orders. The benefit of “Limit” orders is that it will allow you to maintain control of the price of the transactions that you partake in as opposed to “Market” orders. The “Market” orders could cause you to purchase stock at an inflated price or sell it at a really low price.
Watch out for potential pump-and-dump tactics that are used by shady sales people to rip people off. The basic premise of a pump-and-dump includes an investor, who is usually the manipulator and the only one who will make profit, buying a large amounts of a stock that has remained stagnant for a considerable amount of time. After their purchase, they will aggressively promote the stock as something that is currently a good buy due to it showing signs of an upward trend. The trick here is that the upward trend was created purely by the manipulator, so the stock will actually not increase organically by itself.
After the buyers buy large amounts of stock, the manipulator will then proceed to sell his inflated shares, gaining profit at the expense of all the other investors losing money. To make sure you don’t get scammed, make sure to research the company that you are about to invest in thoroughly and remain cautious of any newsletters, “hot” or “secret” stocks and e-mailers as they are the most common places where the pump-and-dump scam can take place.
On the Mend
Also look for turnaround companies, that is, companies that went bankrupt and are currently restructuring. They can be good potential investments as their stock prices are starting low and can go up as the company becomes more and more successful.
Invest Your Time
Finally, most of the successful penny stock traders spend most of their day at their computers, keeping tabs with their stock prices to be able to trade at a second’s notice. Don’t expect to buy some stocks and then leave them for a few days and make a profit as while that is something that could happen, you’re more likely to not gain as much profit as you would if you paid careful attention.
Another helpful tip is to sign up for a subscription that sends you current updates on the most promising stocks and cues you when to buy and when to sell them. When such information comes from experts in the field, you take a lot of the guessing game from the table and increase your chances for success. Jason Bond is one such expert, having made his fortune in trading and is not helping others to do the same.