Investing in Penny Stocks for Dummies

What Are Penny Stocks?

Investing in penny stocks can be a great way for people to invest a little bit of money and make a small return on their investment. They can also be a great way to train for buying and selling “real” stocks. Penny stocks are the common shares of public companies that are generally traded at low prices per share. According to the SEC in the United States, these stocks trade at below five dollars a share. The fact that these shares are traded at such a low rate also means that the rate of return will not get very high. The stocks are, however, extremely volatile and are subject to manipulation through stock promotion and other such schemes.

Why Invest in Penny Stocks?

People often find reasons to invest in penny stocks that are not quite on the level. It is important to recognize four major factors that make these stocks risky so that you can avoid costly mistakes:

Penny Stocks for Dummies: Investing Tips & What to Watch Out For

Lack of information available to the public about the stocks. Information is often extremely difficult to find for the small companies that trade in micro-cap (penny) stocks.
No minimum standards are required to remain on the stock exchange. Occasionally, this is the reason why a stock is listed on these smaller exchanges to begin with. if a company cannot maintain its position on the major exchanges, they are then moved to the smaller exchanges.
Little or no company history. Many companies that fit into the micro-cap stock categories are either approaching bankruptcy or are brand new. This leaves no track record that can be viewed for the company regarding their history. A lack of information over a period of time makes it extremely difficult to judge these companies on their own merits.
Lack of liquidity. Stocks without a lot of liquidity raise the chances that the stock won't be able to be sold. Nobody wants to purchase some stocks and then be left holding the metaphorical bag on the whole deal.

How to Invest in Penny Stocks

Like any new venture, the more homework you do the better your investment is likely to be. Here are the key steps to investing in penny stocks:

Do your homework – Know the risks. Learn about the company. Understand what a penny stock is.
Open a brokerage account – This is needed to invest in stocks. Many online sites offer this service to their customers.
Look at penny stock trade statuses – Make sure the stocks are available and are on the level.
Hype – Avoid it. This is where you can get defrauded out of your money. Leverage research and information from established, trusted professionals with a track-record of success in the industry but always complete your own research before investing your money.
Don't short – It is more likely that these stocks are going to rise in value in the future than fall. They are worth almost nothing to begin with so if you are going to sell fast make sure you are paying attention and know when to get out for maximum returns..
Choose a strategy – Aim for 20-30% profit based on a quick selling strategy rather than going for a long term strategy that could result in disaster over the long term.
Buy, hold, sell – Understanding when a penny stock is about to explode and learning to identify the best time to sell is the key to successful day trading. Finding and investing in a trustworthy resource is the best way to learn about investing in penny stocks.

I hope this brief overview of investing in penny stocks for dummies has been useful to you. While penny stocks are volatile, it can be a good way to get your feet wet as an investor if you don't have, or want to spend a great deal of money on your investments. To make real money on penny stocks, though, you really need to buy quite a few shares.

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