While almost everyone who can do 5th grade math can trade in penny stocks, some essentials are still required. Naturally, you don’t want to lose your entire investment in the very beginning. The nature of these cheap shares is often unpredictable, and for many investors this is what they are looking for – a quick and risky way to get rich overnight. Unfortunately, you can also lose everything as easily. Knowing a few rules may make a difference between success and a statistic.
What is penny stock trading?
Penny stocks are equities issued by small and relatively unknown companies hoping to make it big. Their shares are priced by less than 5 USD so you can buy a substantial number of shares for cheap. Since penny stock companies are mostly insignificant for big players, they are not listed on major exchanges like NASDAQ or NYSE. This means that they are vastly unregulated securities, and traded online vie electronic quotation systems like Over-the-Counter Bulletin Board (OTCBB) or the Pink Sheets.
Before you start, make sure that you have a secure and reliable Internet connection at your disposal. As with every online financial transaction, don’t forget to follow the security precautions, like using a strong password, avoiding public connections and logging off promptly. When you decide to set up an account with an online broker, check out that your broker is “penny stock friendly”, as well as if there are any extra fees or minimum deposit limits for penny stock trade.
The next step is to deposit the funds you want to invest into the brokerage account. Do so several days before you need it as there is often a day- or even a week-long delay between the moment you make the deposit and the moment you can use it for trade.
Now, don’t confuse this delay with the three-day settlement period for stock market trades. This three-day settlement period is universal for all trades, no matter if you are buying or selling. In other words, the brokers have to provide you the share you purchased or the funds from a sale within three days. Still, the several days’ settlement period is rather uncommon, as most brokers will process your transaction within minutes.
Make sure there is a market!
The first stage of making money with penny stocks is to know how to get the shares you want at a price you are willing to pay. While purchasing a stock on the NYSE is relatively easy, with putting in the market order which is filled immediately at the price you want, but with these micro caps, they are completely different. When you discover a penny stock that meets your criteria, you should analyse how it trades. You can be sure that the price will be fair with penny stocks that are traded in high volume. On the other hand, with thinly traded stocks, it is not advisable to buy shares without a limit order.
The trade volume is crucial. The more market makers and buyers, the more frequent the trading, but the smaller the gap between how much a seller is willing to take for their shares and how much a buyer is willing to pay. Avoid purchasing shares of the smallest stocks in the market, as they can sit there for hours or even days without a single transaction.
Follow the Bid and the Ask
Online brokerage services usually have a lot of useful extra features that are unavailable on free financial sites. One of the most useful tools for a penny stock trader is the real time quote window. Open it up to get the real time insight into the bid and the ask. This information will help you decide how much you should pay for a stock before you make a purchase. However, keep in mind that the current stock price needn’t be the price you’ll have to pay to get hold of its shares. It only indicates the price of the stock at the last transaction.
Unless you are planning to make a quick trade, it pays off to wait. If the early morning hours see extensive amount of trade, the situation will likely cool down after the first half hour of trading. While this may not always be the case, knowing this will sometimes help you save some money for your next purchase. Build your position over time, especially if you want to make a long-term investment. Instead of dumping all the funds in one big order, trade lightly over days or weeks to feel up the market.
As you can see, penny stock trade is not for the faint-hearted. You should be willing to take some risk, and, respect the risk. On the other hand, if you are a bit of a gambler, you can hit a goldmine with these inexpensive shares. A good thing is that, unlike major exchanges, which have set a score of limitations and exclusions to keep the small folk out of the executive game, everyone can enter the game with penny stocks.
John Stone spent a better part of his life working as a business consultant. He is currently the editor of BizzmarkBlog. Always on the move and keeping up with the latest developments in technology, through years of experience he became a devout believer in the notion that form should always follow function and that developing the ability to think outside of the box is a prerequisite of being a successful entrepreneur. In his spare time he enjoys playing guitar and watching Formula 1.
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