Investors use the term Penny stocks to describe high risk stocks that trade for less than $5.00 a share. These stocks are not traded on traditional stock exchanges, like the New York Stock Exchange or the NASDQ, but are bought and sold “over the counter”. Companies offering penny stock are generally newer, smaller companies, and are not subjected to the same filing and regulatory standards. Investors in these stocks are not looking to accumulate long term wealth, but rather are looking for short term capital gains.
Since these stocks are not traded on traditional exchanges, you cannot buy or sell them through a broker. In order to buy and sell these stocks, you’ll want to establish an account with an online broker, like E-trade or TD Ameritrade. Most online brokerage firms require you to set up account with a small to medium balance to cover both your purchases and any fees. This works in your favor, because the speculative nature of penny stock trading requires a more intensive and hands on approach for investors. These stocks require consistent monitoring, as losses and gains happen much quicker than with traditional stocks and investments.
When you buy penny stocks, you purchase the shares at a sellers “ask” price, and then you in turn, can offer the stock at your determined “bid price”. Money is made and lost when the spread is or is not covered between the ask price and the bid price. The buying and selling prices may vary wildly from seller to seller.
Due to the highly volatile nature of penny stock trading, investors can be subject to fraud and investment schemes. Investors should exercise due diligence and research each company’s financial health and overall business models and practices. Websites like Google Finance and Yahoo Finance also offer information and research on these stocks and the over the counter market.
Many websites also offer “hot” stock tips forany given day. These sites depend on the recommendations of successful penny stock investors. You may also have access to chat rooms and discussion forums which allow you to follow a particular stock and ask questions of other investors.
Penny stocks, because they operate under less strenuous filing and listing regulations are prone to fraud. One popular fraud is for an investor to buy large amounts of a stock and then use the chat rooms, blogs, and discussion forums to market the stock as a good buy. Many times, these companies are financially unstable and will fold soon after the stock is bought and sold, leaving some investors with worthless pieces of paper. Com
panies involved in Initial Public Offerings ( IPOs), have been courting investment Capitol, so they may have more public information about their business and finances available.
Penny stock investments are not part of a long term wealth management or growth strategy. These high risk, high reward offerings give investors an opportunity to make some money quickly, as long as the investor practices due diligence before purchasing and monitors the stock consistently.