Why Trade Penny Stocks?

Penny stocks are low-priced securities that are currently trading $5 or less per share and are traded outside of the main markets, such as NASDAQ, AMEX and NYSE. Frequently these stocks have dropped from much higher prices and now trade relatively small with low volume. And because they are commonly maneuvered independently and are extremely cheap, penny stocks have been often labeled as nothing more than a beginner’s game for inexperienced investors.

Now, before a broker-dealer can ask or sell a penny stock, SEC rules and guidelines need the firm to first let and permit the customer for the transaction and receive from the customer a written agreement to the transaction. The firm should provide the customer a document demonstrating the possible risks of investing in penny stocks. After that, the firm should tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will get or receive for the trade. Then, the firm must send monthly account statements describing the market value of each penny stock held in the account of the customer.

So, why try trade penny stocks? Penny stocks allow a speculator to buy a large number of shares with a relatively small amount of money. The speculator, then purchase the best penny stocks, which hopefully will yield or create a large return on their initial investment. Now, if a speculator has a strategy, it can possibly work; but then, the odds of succeeding at this game are slim to none though.

To effectively and successfully trade penny stocks, there are a few instructions you should consider.

First, contact a broker if you are looking for some advice on how to get started but never expect a professional to take over a portfolio based only on penny stocks. Because the potential for profit is small unless of course you are willing to invest huge amounts of money, a broker is unlikely to be interested. Once you learn the fundamentals, however, you must be able to trade over the internet or phone no longer needing help from a middleman.

Second, you should always remember that penny stocks are very high-risk investments. While they are more likely than any other type of stock to lose value over a long period of time, increasing their value to double or triple is a possibility.

Third, consider where your local over-the-counter (OTC) market is best situated. And since penny stocks are typically not traded through the stock exchange market but instead through side exchange sites, locating a direct contact is needed.

Fourth, you should understand and learn the bid and ask price connection. Why? It’s primarily because penny stocks are being sold not by single unit price but by estimated values. So when you decide to purchase a penny stock, you are actually paying the ask price, which is what the seller considers a fair value for the stock. Of course, this is not necessarily the true value of the stock. Often times it is inflated by at least 25 percent. A spread is called the difference between the bid (real) and ask (selling) price and is the base in which you will have to compute your potential earnings.

Fifth, you should use a broker if you plan to purchase stocks in sets of 100. Typically, these are being sold by people called as market makers, who are responsible for handling penny stocks and organizing their sale in a way almost identical to an auction. And since you are only allowed to purchasing 100 stocks, you can always choose to back out if it gets too pricey on subsequent sets.