How to Buy Penny Stocks (The Basics)
The penny stock market is often considered a scrap yard hidden behind glamorous top-tier exchange markets. But they can be an exciting introduction into the fast paced world of trading with both risks and rewards abounding. If you’re wondering how to make money with penny stocks, read on!
What are penny stocks?
Small companies, especially those just getting started often have little or no capital to work with. One way for them to get the capital is reaching out to the public to raise capital for their business.
Unlike blue chip stocks of large, established companies, penny stocks are chips off a block of a company. Usually a company that has a much lower total company value – often below $50 million. The result is a low value stock that can trade from anything between $.0001 and $5 per share.
The most distinctive feature of a penny stock is its risk profile. Penny stocks are considered high risk investments, but why is this the case? There are a few factors in the driving seat.
Penny stock risk drivers
First of all, the world of investing is built around some basic architecture. One pillar of that is access to information which is the key to making informed decisions.
The information available on penny stocks is not as accessible or as firmly reliable as the data you will find for blue chip stocks. This is because often, penny stock companies do not qualify to register on top-tier exchanges like NASDAQ or the New York Stock Exchange, where the SEC maintain strict requirements on the kind of information that needs to be shared.
The Securities and Exchange Commission is a body that governs all publicly traded companies and have processes in place which funnel out a lot of comprehensive data about companies that are useful for investors. These stringent road blocks brought about the question of where to trade penny stocks.
Penny stocks therefore have their own markets where their shares are exchanged, and where the information requirements are not as intense. These secondary markets represent an alternative trading system and are dealer networks that include for example, Pink Slips or Over-The-Counter Bulletin Board (OTCBB).
Secondly, trading from penny stocks can be challenging if you cannot find an interested buyer, for example, when you want to sell your penny stocks. The ease of this process translates to how much effort a trader needs to pour into making money from penny stocks. This is market liquidity and how liquid penny stocks are depend on a lot of factors. This uncertainty breeds risks into penny stock investments.
High Risk, High Reward
On the other hand, because of its low value, there is a potential for higher reward. Penny stock issuing companies start from the bottom and have the potential to succeed and become high grossing companies. This could bring back incredible returns, all in line with the ethos – high risk, high reward.
Penny stocks can be good investments if you know the right ones to invest in and have a healthy awareness of related risks.
How do penny stocks work?
Stock brokers play an important role in the penny stock marketplace. They are part of the necessary infrastructure to facilitate the buyers and sellers. They also significantly influence the preferences, behavior and trading patterns of investors.
A key feature of the penny stock arena, is that it does not operate at the same pace as typical stock on a mainstream market. In top-tier exchanges, investors generally look for a stock they can hold on to for the mid to long term as the value of the stock climbs with the growth of the company as it progressively creates more value through its business. Instead, penny stocks move quickly with the daily peaks and troughs brought about by trading.
How to make money in penny stocks
Penny stocks can be attractive because of the lure of making quick money, and you may be asking yourself “How can I buy penny stocks?” There are a number of ways to make money with penny stocks, mostly rooted in the basis of buying low and selling high.
How to buy penny stocks
There are a number of options for someone weighing in on how to make money on penny stocks. Stocks can be managed over the phone as well as the more popular method of trading penny stocks online. Simply open an account with an online brokerage service, and start trading.
There are also full service brokers who offer advice and expertise to help make a wider financial plan for their clients.
The question of how to buy penny stocks also rests on deciding on what penny stocks to buy. The trick is to understand the limited visibility that is offered to traders and using that narrow range of information to cherry pick the right penny stocks.
How a trader finds penny stocks and how they buy penny stocks depends on what they are looking for. For traders looking for a more controlled environment, the mainstream exchanges do carry companies that offer stocks prices under $5. They represent something of a lower risk considering that they were channeled through SEC guidelines to be listed. Traders simply have to filter for this price range.
For the high risk essence of penny stock trading, traders will move outside of the top tier exchanges and start evaluating the stocks listed in secondary markets, looking at climbing stock prices, and factors that propel the movement. It is an important aspect to understand because the nature of the market place gives a lot of leverage for players to influence prices for their advantage.
Making money with penny stocks is akin to gambling than a structured approach to financial planning. Despite this, it carries a place in world of investments, especially for energetic financiers who want to operate in a fast paced atmosphere of risk and very tangible rewards.