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How to Invest in Penny Stocks: Pick and Trade Penny Stocks

By Tamon

Penny StocksTrading in penny stocks for most people has never been a problem, but knowing the best stocks to pick and trade in is. While investing in penny stocks is a risky adventure, picking the best stock might go a long way to lower the risk and increase your chances of success. The key to trading in penny stock is simply found in providing answers to what are penny stocks?

Remember that our main aim of investing in stocks is to make profit. Therefore, anything that will lower our chances of hitting our target must be avoided at all levels. Penny stocks are generally investments in startups and small businesses, and present a high risk of loss, but also present a higher return, if the underlying company ends up succeeding.

Experts do explain that, a carefully chosen stock, following a series of technical studies may not only lower investment risk, but place investors on the edge of hitting high. Thus, if you have decided to start investing in penny stocks or you are already trading in penny stocks, you must know how to pick the best penny stocks for trading.

 

How to Pick and Trade Penny Stocks: What are Penny Stocks?

Many people who have at one time thought of investing in the stock market have at one point dash out that dream. This may have been due to varying reasons. For most, it has been due to the inability to raise the fund or the difficult decision to take the risk with huge amount of money in the stock market. The good news is, there are a lot of Penny stocks we can trade in with a relatively small amount of money. But what are penny stocks?

Penny stocks, also known as low-grad securities, are stocks that typically trade for less than $5 a share and outside of the major market exchanges and has a small market capitalization. These stocks are also high-risk investment alternative to traditional bond and stock trading due to their lack of liquidity, small capitalization, large bid-ask spreads, and limited following and disclosure. 

Penny stocks are typically investments in small companies, and present the highest risk of loss; however, they also have a promising higher return if the underlying company succeeds. You may choose to supplement your investment with purchases of penny stocks, but due to their high risk, they should not be relied on as a primary investment.

If you have resolved to get involved in this kind of trading, then you can find here some of the most common steps recommended by experts who advise on how to invest in penny stocks in a smart and profitable way.

 

How to Pick and Trade Penny Stocks: Penny Stock Investment Strategy

To be able to succeed in your buying and selling penny stocks, you must develop an investment strategy. Such strategy should be able to address the high risk level, volatility of the stocks and liquidity problem involved in trading in penny stocks. 

How to Invest in Penny Stocks: Get ready for risk 

Whether you are a seasoned investor or a new investor moving to investing in penny stock, you should keep in mind that you are getting yourself a very high trading. While certain penny stocks have the potential to deliver very high returns on investment (ROI), most experts estimate that more than 80% of these stocks are not worth the investments.

Most penny stocks are traded markets other than the New York Stock Exchange (NYSE) and the NASDAQ because the selling companies do not qualify to register on these top-tier exchanges. These companies are instead registered with secondary markets such as OTC-QB and QX or Pink Slips that allow stock sales without requiring SEC filings or other comprehensive registration data.

Pink Slips are referred to as the riskiest securities market. This is due to the fact that this market doesn’t require any filings or records to sell stocks there.

In addition, there is usually very little information on these stocks, and it is often times difficult to verify the reliability of any information you do find. Like the saying “information is key,” gaining enough tangible information that would help in making informed decisions is considered the most important factor in any successful investment strategy. But with the Penny stocks trading, this information is more difficult to access. Also, companies that are listed on the pink sheets are not required to file with the Security and Exchange Commission (SEC). This makes it difficult to regulate or publicly scrutinized as the stocks represented in the NASDAQ and the New York Stock Exchange. The most disturbing about this is that the information available about Penny stocks are not usually reliable (are from non-credible sources).

Finding a buyer for penny stocks can often times be difficult. If you are unable to find a buyer, you may be forced to lower your asking price until it’s no longer considered profitable. That's not a typical a winning proposition. Low liquidity stocks are generally faced with two problems.

a)    Inability to sell stocks: There is the possibility that they won't be able to sell the stock. Stocks with low level of liquidity may be very difficult to find a buyer. Also, companies having low level liquidity may be required to lower their price until it is considered attractive to buyers.

b)   Stock prices: Companies having low liquidity stocks give room for some traders to manipulate stock prices. Fraudsters often takes advantage of this low liquidity stocks to make easy money by applying the pump-and-dump strategy. This simply means investing heavily in a stock, hyping it up, or manipulates it using less-than-honest business practices, and then finding gullible investors who are willing to take it off their hands.

Furthermore, penny stocks trading outside the major exchanges lack minimum standards:Stocks listed on the pink sheets and over-the-counter bulletin board (OTCBB), are not requested to fulfill minimum standard requirements to remain on the exchange. Also, companies that is unable to maintain its position on one of the major exchanges, do moves to one of these smaller exchanges. While the pink sheets and the OTCBB do require companies to file timely documents with the SEC, the minimum standards that act as a safety cushion for some investors and as a benchmark for some companies, it becomes difficult to regulate or have any standard for trading in penny stocks.

 

How to Invest in Penny Stocks: Assess your investing needs

Penny stocks, due to their risky nature, are not a recommendable investment for long-term savings plans. That is, if you are simply investing your savings, investing for your children’s college, or retirement, it is generally recommended to invest in traditional stock and not in penny stocks, simply due to the fact that the risk of loss associated with investing in penny stocks is so high and you may easily lose part or all of your money.

Penny stocks are better suited for frequent buying and selling with discretionary funds, or short term investments. Because most penny stocks are sold by startups or small businesses trying to gather momentum, so it won’t take you more than a year to determine whether or not the company is going to do well and succeed.

Consider investing the bulk of your funds in less risky securities while using just a small portion of your investment to buy penny stock. By doing this you will protect the greater part of your investment from loss by rooting it in more secure investments, but at the same time, you will open yourself to the possibility of high return of investment through penny stock gains.

Most people believe all stocks start as penny stocks, this is not true. Most high value stocks such as Microsoft, GM, Google, and Apple all started out on a secure stock exchange like NASDAQ and NYSE, unlike penny stocks that mostly start from less secure markets like Pink Slips and OTC. While a handful of penny stocks will eventually grow strong enough for sale on a secure stock exchange, most won't.

 

How to Invest in Penny Stocks: Prepare yourself for the loss

One reason penny stocks are so cheap is because they are inherently very risky, and often than not, the underlying businesses fail. Most people investing in penny stocks (buying and selling) are aware of the fact they will lose some of their investments. To mitigate their risk, they prefer a situation where they are able to give off just a few gems among the stones that will provide high returns. Consider this principle as you plan to invest.

 

How to Pick and Trade Penny Stocks: Researching Penn Stocks

How to Buy Stocks: Look for company data

Once you land on a stock you are interested in trading, start with a thorough research about the company to determine its growth potential and prove a worthwhile investment. There are a lot of difficulties in researching penny stock companies, most of which is based on the market the stock is sold on and the company. You should prioritize trading in penny stocks that you find verified information on, and stay away from stocks that don’t present any real data on themselves. Note the use of verified information in this situation. This is because, most information on penny stocks is from fraudsters who are trying to lore gullible investors into their pump and dump strategy.

If you are interested in penny stocks, search for those penny stocks that are traded on a secured exchange such as the NYSE or NASDAQ. You will be able to read the company’s SEC filings and quarterly financial statements for free online. These resources provide investors with details about the company's historical performance, and the attached management discussion provides an outline of the company’s vision for the future.

If you prefer investing in penny stock traded outside of the exchanges, like through OTC markets such as the Pink Sheets, use tools such as Yahoo’s finance or Google’s websites to search for the category of penny stock you would like to purchase. Conducting your research directly through a reputable third party source (like Google) will ensure you aren’t being scammed. Avoid get rich quick scheme send to your inbox through emails or other marketing articles paid for by companies looking to sell stock.

If you choose to trade in a specific penny stock and unable to find any data on the company, be careful! If you are certain you want to invest in the stock, use Google maps to determine whether the company is operating as it represents and has a legitimate place of business.

 

How to Buy Penny Stocks: Analyze the company’s balance sheet

A company’s balance sheet should provide a list of all the assets the company owns, including liquid investments, real estate, cash, equipment, outstanding amounts owed by customers (receivables), and other forms of property. It also contains a list of the amount of equity in the company retained by the owners, and the amounts the company owes in liability to other companies. The balance sheet should be able to tell whether the company has enough liquid assets and cash on hand to pay its short-term liabilities (the liabilities it owes in the next year).

 

How to Buy Penny Stocks: Study the company’s profitability. 

The company statement of earnings, or income statement, shows how much money the business brought in as revenue during a period, and then how many expenses the company had to pay for associated with the revenue. Check on whether or not the business had positive operating income. That is, did the business bring in more than it paid out? A business that operates at a loss (has negative operating income) is less likely to grow and increase its value.

 

How to Buy Stocks: Check out the cash flow

A business’s cash flow statement provides information on the areas it made and spent cash during the period. You should be able to identify from its cash flow whether the business is spending the bulk of its cash on financing activities, investing activities to grow the business, or on operating activities to run the business. These spending patterns can signal to you whether the business is struggling to pay debts (spending more money on financing than operations or investments), or if it is growing (spending money on operations and investments)

 

How to Buy Penny Stocks: Consult the experts 

While you should ignore solicitations or avoid third parties such as the company’s management, to buy penny stocks, you can have more luck reading on sites like Google Finance and BusinessWeek, where investment experts and writers share their tips on penny stocks. These tips are more reliable as it is not endorsed by a specific selling company or paid for. Use these sources to learn as much as you can about a business from others who have experience in the same stocks or done the same research.

You may also consider speaking to a financial advisor on penny stocks, but bear in mind that they might not want to advise you in purchasing high-risk securities or penny stocks. Advisors are required to speak explicitly to investors, focusing mostly about the risks of investing in penny stocks, and many refuse to practice penny stock investing because it is just too risky. If you are lucky to find someone who will work with you, they can better assist you in finding financial information and doing research on companies selling penny stocks.

 

How to Buy Penny Stocks: Beware of penny stock scams

Many shady businesses sell stocks in shell companies that don’t even operate their own businesses in order to make quick cash by selling stocks before bailing. You should be able to identify these companies and stay off investing in anything you receive solicitations to purchase. These solicitations are often agents paid for by scammers looking for windfall sales. Rather, limit your investments to stocks you learn or find about through reputable sources.

 

How to Pick and Trade Penny Stocks: Buying Penny Stocks

How to Invest in Penny Stocks: Create an investment account. 

Once you have made a decision on what business or companies you want to purchase penny stocks from, you will have to register with a platform to start trading. Most trading platforms, like AmeriTrade, eTrade, and others, all provide access to penny stock trading.

If you already registered, or have an existing online trade account for stock exchange, you can use the same account to trade penny stock. Most platform charges some commission fees for facilitating your trades. Check your individual plan to learn about these fees.

If you don’t have an investment, trading account or haven’t registered one, you should create one and deposit enough funds to be able to start trading penny stocks. Because most stock trading platforms or tools will charge a commission fee for facilitating your trades, consider the cost and choose the commission plan and platform that fits your trading needs.

 

How to Invest in Penny Stocks: Get a Broker and Open a brokerage account 

If you are unable to buy the stock you want directly from the issuing firm, you'll need to use the services of a broker. Brokerage houses vary in terms of the services they provide. This simply means that you'll have to compare many brokerage firms and choose the brokerage that best aligns with your goals. Most of these brokers can be found online which helps to facilitate your investment process. There are two types of brokers: full-service and discount.

Full-service brokers: These brokers are generally more expensive. They target their services to investors interested in receiving guidance and recommendations. The higher fee may be worthwhile looking at the services they provide. However, because full-service brokers typically provide valuable assistance, if you’re unable to make a decision, not confident in your ability to pick stocks or how to buy stocks, consider working with a full-service broker.

Discount brokers: If you confident in your ability to make your own investment decisions or know how to invest in stocks, go for a discount broker. There is actually no point in paying a higher fee for services you aren't going to be using. However, you must examine each broker's platform or tool closely to make sure their offerings align with your investment objectives.

Search discount online brokers: Analyze the fees, especially those hidden charges that may not be mentioned when you first contact a prospective broker. Seek to have a written disclosure of all fees charged.

 

How to Invest in Penny Stocks: Make a penny stock purchase

Once you have registered with your broker, created your account or signed into your account and have access to some funding, you are ready to start trading penny stocks. Choose the stocks you have conductor enough researched on, search for their ticker symbols, and select the quantity you want to purchase.

 

How to Invest in Penny Stocks: Monitor your investments and know when to sell 

Because penny stock is volatile (values fluctuate rapidly), you should invest patience to monitor your investments closely and determine when to move on from a specific stock. Keep trading following your investment strategy and keep an eye on your portfolio’s performance.

Because of their volatile nature, penny stock values often fluctuate dramatically in a very short period of time, you may decide to sell a stock because of its high performance, accepting the profits you have received to date, pulling out to prevent future devaluation and reinvest when the ground is level again.

You may find some stocks plummet in value just after you buy them. This is actually some of the risk of investing in penny stocks or low-grade securities and should be expected.

 

How to Invest in Penny Stocks: Keep investing 

Investing in penny stocks requires a great deal patience and dedication. While most stocks don’t turn into gold mines overnight, you will most often have to resell your stocks to invest in other companies or start from scratch. You should expect to repeat this many times before you make any meaningful return from your investment, but if you took your time to conduct enough research and invest long enough, you just might hit a jackpot.

 

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