Penny Stock Trading
Penny stock trading is a great way for someone to begin learning the art of trading stocks on the open market without great fear of losing a lot of money. Penny stocks by definition are those traded company stocks worth less than a dollar. They are very susceptible to highs and lows and can experience wild swings often in just a few minutes time. These small shares are tremendous training grounds for those wanting to learn the often complicated world of stock trading. Once the basic principles have been learned, many traders of company shares move on to the more expensive shares and into higher profit making capabilities.
A penny stock usually trades outside the major stock exchanges bailiwick. These micro priced shares are almost always of a very small company and are often called nano, small cap, or micro stocks. Growth on these small cap shares may jump as much as a hundred percent in a few days, or take a dive that quickly also. Many of the nano shares can lose all value over a period of time and so to hold a large number of the these shares in a penny stock trading portfolio can actually make for many sleepless nights for an investor, especially if there is a lot of money tied up in them. IN many cases, there is little reporting that goes on among these small companies, making it more difficult to assess financial health or stability of a company. The investor who faces losses may want to keep the words of Solomon in mind during hard times. "To everything there is a season and a time to every purpose under heaven...a time to get, and a time to lose; a time to keep and a time to cast away." (Proverbs 3:1, 6)
Suppose that a person buys ten thousand shares of a fifty cent stock. The penny stock trading transaction cost this investor five thousand dollars in shares of a very small company that has only been in business a few years. A tornado rips through the company's town where its only factory is located, wiping out more than half of its equipment. The next day the share drops a full sixty percent on that storm's destruction. The portfolio over night is only worth two thousand dollars. Because penny stock trading is based on companies that have less than ten million dollars of assets, even an overnight storm can bring horrific loss to an investor. On the other hand, just one mid-sized order from a customer can also boost a company's penny stock dramatically and give an investor an immediate profit on a relatively small initial investment.
This is the appeal of penny stock trading for many traders. Few large companies whose stocks may rise by parts of one percentage point in a day can offer the amazing quick profits of these small cap shares that are traded like Halloween candy. But this high volatility does lend these nano shares to be manipulated rather easily by fraudulent claims and false rumors of a company's sudden success. Because there is little paperwork on the micro-stock companies, little verification of "Amazing profit making ability" or "Buy it now before it really takes off" claims make penny stock trading a prime playground for fraud, deception and manipulation. Small cap trading has especially been prevalent in fraud overseas where stolen electronic passwords are used to buy and then dump these small value stocks, leaving the victims with zero value worthless shares.
Often the investors in the Standard and Poor's 500 type companies feel that small cap trading is beneath them. The lack of information about a small company can be a real turnoff for those investors who want to be fully informed on their decisions. The character of the small cap market then becomes very highly speculative and that atmosphere is not where a lot of investors like to abide. Fears of takeovers, gains and losses measured in hundreds of points, high exposure to influences such as weather and news events and advances or declines measured in hours and not months or years keeps conservative investors away from penny stock trading. But that does leave a wide open opportunity for the well informed and the high risk taker.
Those experts that give advice about buying and trading shares are constantly harping on the importance of having a diversified portfolio. Diversification enables a person to weather volatile times in the market because money is spread out over a wide range of investments and not riding on one business sector. This can be one of the real drawbacks to having a portfolio of large cap investments. The high price of well known stocks can keep a person from being able to afford a wide spectrum of company stocks. Thus, when hard times fall on one industry sector, it can often hit a limited investor quite hard. Not so with a portfolio filled with small cap companies. An investor can afford to have a wide range of business interests that can help to weather one sector volatility.
For the nano stock trading investor who can truly take the time to investigate small companies and use more research than speculation, the opportunity to find a fledgling Microsoft or a McDonalds is amazing. Imagine buying one hundred thousand dollars of fifty cent shares in a wind turbine company whose shares in twenty years may be worth seventy five dollars each! Perhaps these opportunities only come along once in a life time or maybe never at all. But penny stocks are often called story stocks because all they have at the moment are the entrepreneurial stories that are propelling them on to seek investors who believe in the concept. For the dreamer, for the investor who can look beyond the present and see what is coming, penny stock trading can be a way to make dreams a reality.
Penny Stock InvestingLow prices attract many people to penny stock investing. With an average price around $1.00, these micro cap stocks are usually limited to $5.00 or $3.00 per share. For individuals who don't have thousands of dollars available to invest, this type of investing can be a great opportunity to get involved. The opportunity to make a lot of money is limitless. Many large companies did not begin on the major exchanges like the New York Stock Exchange (NYSE) or the NASDAQ. They began on secondary exchanges or pink sheets as penny stocks. Companies begin on smaller exchanges often because the total value of their company is relatively small, between fifty and 300 million dollars. The Over-the-Counter Bulletin Board (OTC-BB) is one of the most popular secondary exchanges. People who participate in penny stock investing are often in search of the next big product and hope to strike gold. Sometimes, they find it, but making money from secondary markets is not that easy.
In short, penny stock investing is much riskier than putting money in traditional primary markets. Larger companies who sell on the NYSE or NASDAQ are required by the U.S. Securities and Exchange Commission (SEC) to release audited financial records for the public to review. Businesses who use secondary exchanges are not required to publicly file reports. When companies listed on the major exchanges can no longer provide the minimum standard requirements, they often move to the OTC-BB. Information is minimal or often non-existent. What little information is available frequently comes from sources that lack credibility. Most stocks on these exchanges are with newly formed companies or those who are close to bankruptcy. Company history is hard to find. Those that have some history often have a poor track record. Another risk factor is low level of liquidity on the smaller markets. Stocks are much harder to resell and sometimes cannot be sold at all. Investors may have to lower the price considerably before finding a buyer, losing money in the process. There are some companies on the secondary market that are trying to build a solid business reputation and gain access to the primary exchanges, but identifying them can be difficult. The SEC does require brokers inform investors of the risks of penny stock investing in writing and get their written approval before making any transactions. Brokers must also be up front about any compensation the firm will receive for the trade and provide monthly statements to the investor.
Penny stock investing is also an easy target for fraud. Some companies pay third parties to recommend the stock in newsletters, on television or radio, or by sending spam email to potential investors. Traders use several techniques to manipulate stock prices on secondary markets to make them more attractive to buyers. In one common technique, traders will purchase stock, then create positive rumors to drive the price up before they sell. In a similar scheme, others will circulate false rumors that drive the price down so they can purchase cheaply and then resell at its true value. The Bible promises that those who deal in fraud will be found out. "A false witness shall not be unpunished, and he that speaketh lies shall not escape." (Proverbs 19:5) Investors must also watch out for penny stock investing pyramid schemes that sell company shells with no product, history or experience to large numbers of people who in turn, often unknowingly, resell to many others at an inflated price. The more the stock is resold, the higher the premium, until it is so over price, the system cannot support the higher sales and it collapses. People who invested last lose the most money. Only the top few really earn a profit. The rest are left with nothing but worthless stock. Unfortunately, there are no federal or state agencies that oversee or regular these multi-level marketing schemes. Not all penny stocks are fraudulent. Companies with low prices are very legitimate. But fraud does occur when they sell overpriced stocks or manipulate the price in any way.
Still, penny stocks do appeal to certain investors. The value of any stock is determined by how much someone is willing to pay for it. The key to penny stock investing is quality, not quantity. Look for potential in the company and in the product. People who want to invest in secondary markets should investigate the stocks thoroughly before buying. Don't allow price to be the only determining factor. Check out the company's financial records, if any are made public. Research the history, revenue, profitability and employees of stocks under consideration. The Walker's Manual of Penny Stocks, available in the reference section of most libraries lists companies that may be good risks. Read magazines and newspapers about penny stocks and the risks involved. Seek the advice of a financial adviser. Set a limit on how much to invest. Most advisers recommend limiting the amount to 10% of savings. Never invest all savings assets into something this risky. But don't be afraid to take some risk for greater returns.
Many investors advise to simply avoid penny stock investing altogether because of the high risk involved. Prices fluctuate greatly. They go up and down very fast. Investors must learn how to invest and how to ride the ebbs and flows of the market. But good investors do takes calculated risks. But high risk is not for everyone. Individuals who are not comfortable with the possibility of losing all their money should not invest in penny stocks, but look for something less risky.