Beginners Guide to Penny Stocks Trading and Investing

This is a Guest Author Post By Dan Radak

If you, just as Jordan Belfort can’t find nobility in poverty, and you’re looking for a path to get rich, you’ve probably considered investing in stock market more than once. What is stopping you? You shouldn’t jump in the water with the big sharks, but start small. And you can’t get any smaller than penny stocks. This world is not risk-free, au contraire. But, if you do your homework well, it is possible to earn a chunk of money. Welcome to the world of penny stocks, this will serve as your guide, so read attentively.

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What are penny stocks?

Penny stocks are shares of companies that sell for temptingly low prices, which may vary from the name-giver itself – a penny (sometimes even fractions of penny) to the upper end which is 5000$. Due to low prices, many people are attracted to investing, because they can afford to purchase 100 or even 1000 shares of penny stocks. There are penny stocks in a wide range of industries, but many of them are in the resource field (gold and silver mining, biotech, medicine research or oil exploration).

 

The upsides of penny stocks

We all have to start from something. And many today’s industry giants have started as small companies which later become very profitable. Some of the today’s bargain stocks are destined to become highly rewarding. There is actually a big chance to win on penny stocks, a valuable penny stock can easily double, triple or even more in price over some years. You just need to know to get in and get out in the right time.

Understanding the markets

Some penny stocks trade on exchanges, like OTC Bulletin Board (OTC-BB) and NASDAQ, a vast majority trade on the Over the Counter (OTC) markets, which comprise the Pink Sheets, the OTC-QB and the OTC-QX.  NASDAQ is a place where you can find mid-range stocks – between $2.00 and $5.00 a share. OTC-BB is the market where you’ll find companies with generally legitimate stocks. The OTC markets are true stock markets, because of the transaction handled on a one-to-one basis – the purchase happens directly between a buyer and seller.

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Learning the basics

There is no investing to any stocks, penny stocks included, without knowing financial fundaments. It is essential you learn the terminology that is constantly used by traders, investors, companies and analysts. On the assumption that you’ve done your homework well, and got acquainted with all of these terms, we’ll move on to our topic – “the slot machine of equity market” – penny stocks.

Investing strategies

There are different strategies for successfully swimming in the se of penny stocks. Each of them has its ups and downs. Here, we’ll mention some of the most important ones.

Dollar Cost Averaging:  Process of buying additional shares of the stock at intervals, no matter of the share price activity, comparatively to buying all the shares at one time.

  • Plus:  Diminishes the risk of investing a big amount in a single investment at the wrong time.
  • Minus:  Each transaction requires you to pay a new commission to your broker.

Stop-loss orders: They are earlier set sell orders that are triggered if the stock falls to a given percentage below your purchase price

  • Plus: Protection from stocks that fall significantly and quickly.
  • Minus: If you don’t stick to the strategy you may be exposing yourself to financial risk.

Position sizing: This strategy is limiting each purchase to a previously determined percentage of your portfolio.

  • Plus: Works well for larger portfolios because the risk affects only small portion of it.
  • Minus: Not appropriate for smaller portfolios.

There you have it. It’s just a start, there is whole world to explore. Good luck swimming with the sharks!

Author Bio: Dan Radak is a web hosting security professional with ten years of experience. He currently works with a number of companies, closely collaborating with a couple of e-commerce companies. He’s also interested in penny stock market. He is also a coauthor on several websites.

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Comments

  • Thank you Terri, Carolyn and Ernestine and this is also something I want to research as also curious about it.
  • Good Post Merle.  I have tried penny stocks before and if had paid more attention I could have made some money  I bought 50 shares of one penny stock and it got up to $16.93 a share - I should have sold then, but greedy me I held on too long and lost.  I will know better next time.  lol

  • Top Member

    Great information on Penny Stocks and investing. Actually I have always been interested in stock investment. You have peaked my curiosity about Penny Stocks, this maybe something to consider.

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