Penny Stocks: How They Work and Investment Strategies

It has been said time and time again that investing and trading in penny stocks is not for the light-hearted. Well, though there lays some truth in this statement, with plenty of risks in the marketplace, investing in penny stocks is not as hard as many people assume it is. There are sizable returns and rewards that stand to be gained.

Let’s start from scratch, you have either never traded into penny stocks before and you are wondering how to get into penny stocks? Or you have been playing penny stocks the wrong way with very small returns. So, how do you invest in penny stocks the right way?

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This article is an introduction to investing and trading in penny stocks where it is possible to make huge returns; if you do your homework right and stick to reliable and useful information that has proven successful in investing and trading strategies. It will massively improve your trading results.

What are Penny Stocks?

Most people look at penny stocks like Wall Street’s Wild West, an insipid world of investing set apart from all the brilliant showiness and media coverage that comes with stocks that are traded on major stock exchanges. Technically, there is no specific response to the question “what are penny stocks” but they are basically shares of low-value companies traded at a price of less than $5 per share and are mainly below a $1 per share.

So then, since penny stocks are not traded in the normal stock exchange market, where can you buy them? Penny stocks, also called micro-cap stocks, trade on listing services like OTCBB, Pink Sheets, OTC-QB and the OTC-QX. They are both traded on exchanges and over-the-counter (OTC).

How Penny Stocks Work

You might be wondering how penny stocks work. Like any other stocks in the market, you can buy shares of a penny stock through a normal stock broker – regardless of whether the stocks are listed on a major exchange or not.

First Steps:

1. Find a reliable discount stock broker (a person or company that does the actual buying and selling of shares for you). 
2. Open a trading account such as you would with a bank account.

The difference is, with a trading account, it not only holds your money but also your investments such as bonds, mutual funds, and stocks.

When you buy penny stock shares of a company, money is taken out of your account and converted into the company’s shares and the vice versa happens, when your penny stock shares are converted into cash.

When looking for an online stock broker, watch out for their trade surcharges, volume restrictions and trading restrictions.

Don’t be fooled by the many disreputable corners of the internet which advertise free penny stock trading; they are mostly scams. The sad truth is, if you are into penny stock trading and not paying commission to a discount stock broker, you’re making someone else money somehow.

Investing in Penny Stocks 101

Though penny stock trading has received a negative reputation in the investment world, take heart, there is an upside story to the penny stock trading.

There are many good penny stocks in the market. Those that are in growth industries and have good products and services that meet the needs of their customers; with strong management teams and good laid out strategic marketing plans.

So, how do you invest in penny stocks in such companies? First, you need to do your research and identify the gem companies among the myriad of companies in the market; they don’t have to be big companies for you to make huge returns

Second, you have to do your homework, consult a myriad of reliable sources, as well as maintaining knowledge on trade status for penny stocks about the potentially high profitable penny stock investments in the market with real assets.

How To Play The Stock

Now that you have done your research and you have your eye on that gem company, how do you play to win and make profits?

1. Complete a technical analysis of any penny stock.
2. Don’t short penny stocks - this is a highly risky and an unpredictable move.
3. Choose a trading strategy – think about how you will buy and sell penny stocks to accumulate capital.
4. Choose high volume stocks, particularly in the beginning.
5. Invest stocks that experience an earnings breakout
6. Don’t trade more than 10% of a stock’s volume in a day and lastly,
7. Buy the stocks, be patient and watch carefully the trends of your brokerage as it accomplishes the desired transaction. Use your judgment and only invest in stocks you understand.