Wouldn't it be great if you could use your last $5 to invest in your future? Most people are intimidated by the idea of investing in the stock market. However, the low-risk aspect of paying $5 or less for penny stocks might appeal to those of us that want to maximize how much we're investing in the future, without disturbing the shaky financial foundation that we've spent years building.
What Are Penny Stocks?
It’s difficult to think about investing in stocks when you haven’t familiarized yourself with the terms. Unfortunately, penny stocks are not stocks that you can purchase for a penny. Penny stocks are low-priced, small-cap stocks. Penny stocks have earned their name because the Securities and Exchange Commissions classifies any stock that sells for less than $5 as a penny stock.
Penny stocks have earned a reputation for being difficult when it comes to making a profit off of them. In fact, you're not likely to see shares of a penny stock for sale on a major exchange, and they are a lesser known trading option in comparison to other stocks that serious investors might buy.
Where To Find Penny Stocks
Investing in penny stocks might sound like it would be more difficult because you don't hear about them as often, and they're usually not hailed as a good way to turn a big profit from your investment. However, you can purchase penny stocks through your stockbroker. It's possible that the penny stock that you're interested in purchasing might not be listed on a major exchange.
You can find penny stocks that you can purchase on an over-the-counter Bulletin Board or an OTCBB (An over the counter bulletin board is an electronic trading service that the National Association of Securities Dealers provides to help traders stay in the loop regarding updated quotes, last-sale prices, and more.
Additionally, you can find penny stocks through pink sheets. pink sheets are daily publications that are assembled by the National Quotation Bureau. Pink sheets usually contain bid and ask prices of OTC stocks. The companies that are quoted using pink sheets don't have to file with the Securities Exchange Commission or need to meet the minimum requirements that you might find on a major stock exchange.
Choose A Broker
Investing in penny stocks is considered a bit of a risky practice because they do not have to meet any minimum requirements set by the Securities Exchange Commission and they are known to be more volatile than stocks that aren’t classified as penny stocks because the price could rapidly swing in a high or low direction.
If you’re interested in investing in penny stocks, you should give yourself the added advantage of consulting a stockbroker, so that they can help you navigate the unsure of waters of investing in penny stocks. Currently, the top four penny stockbrokers are TD Ameritrade, Fidelity, Charles Schwab and Interactive Brokers.
- TD Ameritrade is an online stock broker that caters to traders of all experience levels. At $6.99 a trade, TD Ameritrade is more expensive than a lot of its competitors, but some might feel that the cost is more than made up for with all of the educational resources, mobile apps, multiple platforms, and attentive customer service.
- Fidelity is a full-service broker that has over 17.9 million retail brokerage accounts. Fidelity strives to provide great customer service. Their per trade fee is lower than it's competitors (Charles Schwab, TD Ameritrade, ETRADE) at a rate of $4.95 and $.65 per contract. This broker is a good fit for investors that are looking for low-cost ETFs (Exchange Traded Funds), but individuals that are looking for commission-free ETFs might fare better with Charles Schwab.
- Charles Schwab is a full-service broker that's been around since 1973. Schwab has amassed $2.73 billion in assets, and they're known for their high quality service because of their customer service, trading, and usability. Charles Schwab has a $4.95 flat rate for stock trades, and it's still less expensive than other brokers like TD Ameritrade, Scottrade, and ETRADE. They offer 229 commission-free ETFs and cheaper option trades for a cost of $4.95 and $.65 per contract. However, their mutual funds are a bit pricey at $76 per trade which is currently the second highest rate in the stock market world.
- Interactive Brokers caters to a more high-end level of clientele. They specialize in working with institutions and professional traders. Currently, they offer the lowest margin rates which can vary from $1.41% down to 1.91%. However, Interactive Brokers is pricey, and new or casual investors might want to consider a broker like Fidelity or TD Ameritrade, as they have some additional fees and minimums that could potentially slow down how often you trade.
Finding the Right Penny Stocks
Given that investing in penny stocks can be a complicated and unpredictable practice, you'll want to keep your eyes open for indicators that you should pursue a particular penny stock. Here are a few tips on how you can find the right penny stock.
Narrow Down the Candidates
You're investing your hard earned money, so you'll want to be sure that you don't want to put your dollar behind a lousy penny stock. Penny stocks that go for less than $0.009 per share are vulnerable to manipulation and volatility. When you begin your search for a penny stock, you'll want to look into penny stocks that sell from $0.05 to $2.00.
Be Wary of Dilution
You'll want to work with your stockbroker to ensure that you're not purchasing penny stocks that are likely to be diluted. Share dilution is when shares of a company or stock are split up into more shares that can be bought, and the power that each original shareholder is diluted by however many new shares were added.
You don't want your potential earning power to be diluted, and you'll need to consult with your stockbroker and follow trends so that you put your money into the right penny stocks.
Choosing a Winner
You might think that you've found the penny stock that you want to purchase, but you need to be sure that this stock is a winner before pouring in any money into it. You'll have to take a good look at the company to decide whether or not you're purchasing a winning stock, and then you'll need to ask a few questions.
Does the company rely on the selling of its shares to raise capital? Is the company profitable and will it profit it long term? How does it stand up to the competitors in its industry? Be careful to consider these before proceeding.
There are a few different ways to trade penny stocks, as there's no one way that's been proven to yield a hefty profit for traders. There are a few listed below:
- Consider selling quickly. Penny stocks can jump in value by as much as 20% or 30%, it’s better to sell that particular stock when you see that an increase within that range, as holding onto it and waiting for a significantly larger increase in your potential profits could leave you wasting valuable time on stocks that ultimately won’t move as well as others.
- Don’t dabble in shorting penny stocks if you’re new to the game. Since penny stocks are so volatile, you could find yourself losing a lot on a trade if you aren't familiar with market fluctuations and the volatility of penny stocks. This is part of why it's important to work with a stockbroker when you want to trade penny stocks.
- Buy the penny stocks that earn the most. If you’re working with a broker, you’ll want to use screener tools to find out which penny stocks are earning the most and which ones have consistently earned the most before you make any decisions.
- Be open to letting your penny stocks go. When you are new to the world of penny stocks, be open to the possibility of buying new stocks and selling the shares you've started with. This is especially true given that penny stocks are notorious for being unpredictable, and you won't want to be around to get burned if your penny stocks take a nosedive.
Ignore The Spam
After you begin investing in penny stocks, you might notice that you’re receiving emails that hail the merits of purchasing a particular penny stock.
These are stocks you'll want to avoid because the scammer that hopes to make money off of your purchase has bought most of the shares of the penny stock, so that it reflects a higher price, and seems more valuable.
The even bigger problem with this is that the scammer will have sold all of these stocks at a high priced, and you're stuck with an overpriced stock that you cannot sell. This scam isn't limited to emails; you might also notice this happening on blog posts or online message boards.
If you have the right guidance, you can reap the financial rewards of successfully trading penny stocks. Penny stocks are great for short-term potential gains, and they can quickly increase in value from when you buy them.
If you’re not seeking a long term investment when you begin purchasing penny stocks, you’ll find yourself reaping the benefits of buying and selling penny stocks before you know it.
Penny stocks have earned a reputation for being volatile and being a loss for potential traders. You’re vulnerable to potentially losing a lot of money from your investments because of pump and dump schemes, mining scams, (where a company will claim to be worth more than they are because they own an excess of oil, gold, or diamonds.) and guru or expert scams.
It's essential to use a stockbroker so that you aren't taken advantage by individuals that claim to know the “secret” to being successful at trading in penny stocks. These scammers will offer you false information about the secret to earning big bucks with your penny stock trading in exchange for a fee.
Keep an eye out for scams like this so that you find yourself putting more money into your pocket because of your investments.
Should You Invest in Penny Stocks?
If you’re more interested in finding a long term investment, then you may not want to dabble in purchasing penny stocks.
Penny stocks are a good fit for investors working with a stockbroker that aren't expecting to see a considerable return on their investments. Penny stocks could potentially help you earn a lot, but you have to be willing to gamble. If you buy low-cost shares in companies with a solid reputation and earnings, you'll have more success in trading penny stocks.