Penny Stocks For Beginners

Have you been looking for a great investment opportunity, but you don’t know where to start? Well, have you considered learning penny stock trading?

Trading penny stocks can be extremely lucrative. In fact, it has proven to be so lucrative that countless people have had tremendous success trading these basic stocks and are able to live the millionaire lifestyles that they have dreamed of. However, it is important to understand that not everyone has success with penny stocks, and that unfortunately, many investors are hoodwinked.

Before you jump in and start trading penny stocks, you probably have a lot of questions: What are penny stocks? Can they really deliver successful results? Are there any tips that will help to improve your success? The following article details penny stock trading for beginners and will provide you with all of the information you need to know to make your investments a huge success.

What are Penny Stocks?

If you want to learn how to trade penny stocks, you first need to understand what penny stocks are. So, what is a penny stock? They are low-priced, small-capped stocks. While the name may suggest that they cost just a penny, they rarely ever do. In fact, these stocks can cost up to $5; however, they rarely ever go above that amount.

Penny stocks usually trade outside of the major market exchanges and they typically have a small market capitalization. They usually aren’t traded on standard exchanges, and they also have a higher risk than traditional stocks. And, unfortunately, penny stocks have developed a reputation as a playing field that is filled with corruption and scams; however, if you properly learn penny stock trading, there is a lot of success to be had.

Why are Penny Stocks Risky?

In order to have success with penny stocks, you also need to understand the risks that are associated with them. So, why is it that penny stocks are so risky? There are four key factors that make them a higher risk than traditional blue chips stocks:

  1. Minimal Information Available. One of the primary factors that make penny stocks such a high risk is the limited information that is available regarding them. In order for a have success in investments, you must be able to acquire enough pertinent information to make the most informed and the best decisions. It is much more difficult to find information related to penny stocks than it is to find information related to traditional blue chip stocks. The companies that are listed on pink sheets do not have to file with the Securities and Exchange Commission (SEC.) As such, they are not examined by the public, which means that they are not regulated the same way as the blue chip stocks that are listed on Nasdaq and the New York Stock Exchange. Additionally, any information that is available regarding penny stocks usually does not come from sources that are deemed credible.
  2. Lack of Minimum Standards. Another factor that makes penny stocks so risky is that they don’t have to fulfill the minimum standard requirements that are necessary in order to stay on the stock exchange. In many cases, this is why the stock listed on pink sheets on the OTCBB are listed on these exchanges. If a company cannot maintain its position on a major exchange, it is moved to one of the smaller exchanges; OTCBB or pink sheets.
  3. Minimal History. A lot of the companies that are listed as penny stocks are brand new or they are headed toward bankruptcy, which means that they will have a faulty background, if they have any background at all. Because of the minimal historical information available, it is very hard to tell the potential of a stock.

Minimal Liquidity. When a stock doesn’t have a lot of liquidity, there are two issues that can arise:  1) you may not be able to sell the stock, as it may be difficult to find someone who will be interested in purchasing the stock, which means that you may have to reduce your price to make it more attractive to purchase; and 2) some traders take advantage of low liquidity and manipulate the price of the stock, which can be extremely dangerous

Common Penny Stock Scams 

Unfortunately, penny stocks have long been considered a nuisance by the SEC. This is largely due to the minimal available information and the poor liquidity, which makes these stocks a major target for those who are looking to conduct fraudulent activity.

There are several scams out there that are used to hype up penny stocks and take advantage of investors. Some of the most common scams, or ‘traps,’ include the following:

  • Biased Recommendations. Some companies that are involved in trading penny stocks actually pay people to recommend their stocks. These paid employees will advertise the penny stock across various types of media, including newsletters, radio shows, Internet articles and more. If you ever receive a spam email that is trying to convince you to buy a specific stock, disregard the email, as you are likely being trapped.
  • Offshore Brokers. US-based companies are not required to register the stocks that they sell to foreign investors. Unfortunately, there are many companies that will take advantage of this; they will sell their stock at a discounted price to an offshore broker, and the offshore investor will turn around and sell that stock to US investors; and they’ll make a high profit doing so

The Myth Surrounding Penny Stocks

Investors who are not knowledgeable are often attracted to penny stocks because they believe that there is a lot of room for appreciation, which means there is a greater opportunity to own greater amounts of stock. So, for example, if a stock is being sold at 10 cents and it rises by five cents, the investor will have made a 50 percent return. This is very appealing to investors and can lead them to believe that they will make a great profit at a minimal cost.

Start trading penny stocks today, AFTER YOU LEARN THE BASICS!

There is an opportunity to make money investing in penny stocks; however, you do have to be wise and make sure that you are well aware of the potential dangers that are associated with this type of investing.

Learn More About Trading Penny Stocks