You can understand the meaning of penny stocks better from the fact that a stock ceases to be a penny stock when the share prices of a company rise above$5 and remains that way for quite some time and even stays that way permanently. If you are looking for a proper definition, Penny stock refers to the stocks of a small and usually a new company that are traded for less than $5. It was previously stocks traded less than $1. The $5 is in keeping with the inflation in the market. Additionally, Penny stocks are those that are highly speculative, have a small cap and also have a large bid-ask spread. This makes it the best way to invest money.
Penny Stock Trading
Unlike the blue-chip stocks or stocks of other leading companies in the market, the penny stocks are not traded on large market exchanges. They are traded only through OTCBB and the pink sheets. The Penny stocks are traded as OTC stocks. Just like how the major and bluechip companies are listed in the large stock market, the penny stocks are listed on the pink sheets or Over the Counter Bulletin Board (OTCBB). The dealing of penny stocks is carried out between individuals who are either connected by telephone or computer networks.
Trading with stocks
Trading with penny stocks is quite similar to that in the large exchange markets. The only difference is that these stocks are extremely low priced. You could get to know all you have to about the penny stocks and dealing with it and employ an experienced and knowledgeable broker to deal with these stocks. You need a broker because penny stock is not one that you would invest in and wait for a long time. You need to keep trading regularly and must focus on creating a portfolio of penny stocks that are performing well.
How to select a broker for penny stocks?
Apart from considering factors such as choosing a knowledgeable and experienced broker, it is important to find out how the broker charges his fee. There are brokers who charge extra when the trade lot is large and there are yet others who limit the number of transactions you undertake on a day. It is also important to choose a broker after careful screening. You may even opt for a brokerage firm for you will be able to scan it better with the help of the reviews. If you do have enough knowledge about trading in penny stocks it is better to opt for a broker service that allows you to make trades on your own online rather than having a live broker at your service.
Is penny stocks better than or riskier than mutual funds?
Penny stock can be considered to be riskier than investing in mutual funds. It is because here you are, the owner of the stock, individually. There are two things that can happen. You can double your money quickly or lose everything suddenly. But, even if you invest in one of the top mutual funds which again invests in stocks, bonds or a mixture of stocks and bonds, you can expect wealth creation only in the long run.
However, Penny stocks are considered risky due to two reasons. One of them is that the penny stock company poses a high risk of heading towards bankruptcy. The other reason is that most of the times the penny stock companies would be overleveraged.
Investing in Penny stocks
Despite the risk factors associated with penny stocks, it is one of the best stocks to invest in as you will getter a relatively greater return than what you expect within a short time investing a relatively small amount. However, it is, if everything goes well.
How Penny stocks does it work?
How you can earn relatively high returns by investing a small amount is by virtue of a large number of stocks you can buy with the investment. It can be understood better with an example. say you bought 10,000 shares at $.30 for $3,000. When this stock reaches $1 which is quite possible in a year or so with proper management of the new company, you would have made $10,000 which means an excess of $7000 which is more than double the money you invested.
The benefits of investing in penny stocks
- They are stocks that you can buy with a low capital investment but opens up the chance for making a fortune
- It helps you to maintain a diverse portfolio despite the investment amount being small because all stocks are priced under $5.
- You can access, and trade OTC which makes it a really quick process of the transaction.
- The brokerage fee you have got to pay is really minimum when compared to brokers dealing with major stocks in the large market.
- The movements in price whether high or low is very fast which makes trading and decision making quick and interesting.
You do stand a chance of failure when you invest in penny stocks. But, with research, you can actually identify the pitfalls and avoid it to minimize the risk involved in investing in penny stocks.