How to Trade Penny Stocks

Penny or cent stocks are usually shares of small public companies that have a low trading price. The Securities and Exchange Commission in the US has defined them as stocks which trade at $5 each. When dealing with penny stocks, one must have sound understanding of how the shares are traded. While the lure may be tempting due to the low cost involved, the stock is subject to greater volatility and risk where one can lose instant money.

Instructions

  • 1

    The penny stock will work the same way as any large stock where the investor will be hoping that the price increases after he or she has bought the shares. However, the difference is that the volatility will be much greater as the cost (price) is very low, and the potential of reward can be extremely high. The speculation can have a substantial outcome on the eventual price. For instance if large investors inject their own cash in buying penny stocks, individuals are likely to follow suit, thus raising the overall price.

    For instance, if you buy 10,000 shares at $.50 each for $ 5000, and the stock price reaches $ 1 each, then you will be getting $ 10,000, doubling your amount in a whisker.

  • 2

    In order to trade penny stocks, you must know the market well. Taking advice from a broker will be a good option but they usually deal with large stocks as the profit margin is much greater, unless you buy large amounts of penny stocks. However, with time, it is likely that you will be left on your own where you will be making deals over the internet or on the phone.

  • 3

    Locate the market where penny stocks are traded. Larger stock exchanges such as New York Stock Exchange and NASDAQ don’t deal with penny stocks so you will ideally be searching for an over-the-counter market, which include Over-The-Counter Bulletin Board, Pink Sheets, and DTCC etc. Make sure that the market is a regulated one, with specific rules defined by the SEC and the Financial Industry Regulatory Authority.

  • 4

    Get yourself acquainted with the ‘bid’ and ‘ask’ relationship. As the true market price will not work in penny stocks, the buyer will be paying the asking price (selling), which could be higher or less than the bid price (real). The difference between the two will be the spread.

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