The 411 on Penny Stock Trading

With any new venture, it’s wise to inform yourself of the rules of the road before you start your engines.  Penny stock trading is no exception to this axiom, and you’ll be pleased to know that trading in penny stocks is an uncomplicated and potentially extremely rewarding undertaking. It’s easy to get started and easy to manage on an on-going basis…and here’s what you’ll need to know to make your efforts worthwhile.

In principle, trading in penny stocks is no different, and no more difficult, than trading in large-cap equities. The dynamics of the buy and sell transactions are the same, as are the mechanics of order placement and money management. The only difference is your mindset.

If you’ve already got some stock market experience under your belt, then you’re already familiar with the need to place your buy and sell orders through a licensed stockbroker. Maybe you’re used to working with a full-service broker offering research reports, updated stock market advice and a free cup of coffee when you visit his offices, or maybe you’ve preferred to stick with a no-frills online brokerage service. Most likely, your choice of broker has been based on your comparison of your potential need for expanded levels of service vs. your ability to make your own independent trading decisions, seeking only a platform for the placement and execution of your orders. In addition, you’ve certainly also carefully based your choice of broker on a thorough analysis of their cost and fee structure, as well as on a thorough reading of the brokerage firm’s account terms and conditions.

watch penny-stocks

This is exactly the same exercise you’ll need to perform when getting started with trading penny stocks. In other words, the fact that you’re interested in targeting micro-cap stocks for trading as opposed to large-cap equities does not change the methodology. Find yourself a broker who suits your trading profile in terms of services and costs, and open your account. Keep in mind that many brokers will require either a minimum opening deposit, a minimum continued account balance, or both; equally as numerous, however, are those who have no such requirements (but who might instead impose a higher per-trade fee, or who might charge a premium for completing penny stock trades), so don’t be discouraged.

Although the marketplace within which the vast majority of penny stock transactions take place is different from that in which large-cap transactions play out, the market dynamics are fundamentally very much the same. Unlike large-cap stocks which typically trade on larger and presumably more prestigious exchanges, such as the NYSE and the AMEX, small-cap stocks tend to trade on such lesser-known exchanges as the Over-The-Counter (OTC) Bulletin Board, the OTC QX and the so-called “pink sheets”. Despite this, quotes for penny stocks listed on these exchanges are as easy to find as they are for their “big board’ cousins, and are available from exactly the same sources (such as broker websites, investing websites, the exchanges’ own websites—or even Yahoo or Google). The information’s just as accurate and reliable, and the links you’ll find there to such additional resources as the SEC’s EDGAR system, in order to research company filings, are just as valid. There’s no new territory here.

If you’re seeking to either invest in or to further investigate penny stocks for which you generally find less corporate information to be available, you’ll have to dig for that data yourself in a way that differs from how you’d go about researching more established stock issuers. In truth, the information is available to you if you know where to look; try contacting the company’s own investor relations department, searching the web for press releases and related company-specific material, or reading posts at some of the larger and more reputable investor boards to expand the range of substantive information at your fingertips. Once you’ve compiled your information, your corresponding analysis should be carried out exactly as it would be for stocks trading on a higher exchange. Penny stock issuers are, after all, public companies, just as are the 30 companies comprising the Dow Jones Industrial Index and as such, are subject to the same SEC oversight. From a regulatory standpoint, many penny stock issuers may be behind in the filing of some of their required SEC reports, but this is typical of small-cap companies and thus is no reason to reject the notion of investing in penny stocks out-of-hand. Indeed, many small-cap stocks are listed on the usual penny stock exchanges simply because they are start-ups and as such, do not yet have the market cap, shareholder base or trading volume necessary to qualify them for listing on an upper exchange. From one perspective, this can be viewed as a plus, because the opportunity to invest early and stick with the stock until it gains substantially in value, eventually moving up to a higher exchange, exists only in the penny stock trading realm. In fact, the OTC markets proudly and regularly publish their so-called “graduation list” of companies who have qualified for listing on more prestigious exchanges, and you’d be surprised to learn of how many large-cap firms once started out as a “lowly” penny stock: ever heard of Xerox?
Another positive characteristic specific to trading in penny stocks has to do with the size of your capital investment necessary to get started. By definition, since the share prices of penny stocks are low, you don’t need to stake your trading activities with large amounts of seed capital in order to begin buying and selling small-cap stocks. On a percentage basis, therefore, the gains to be made when trading penny stocks are far greater than those that can be generated by investing in more traditional large caps: as simple as it sounds, if a stock you’ve bought at 5 cents rises to 10 cents, you’ve doubled your investment; you’d be hard-pressed to match that return on investment when putting your money into big board-listed firms. The converse of this principle is, naturally, also true: if your penny stock investment goes south, your losses aren’t as severe, because you’re out-of-pocket a smaller sum. The smaller size of the capital threshold necessary to invest in penny stocks makes the micro-cap market easily accessible to a wide variety of investors.

Once you’ve begun investing in your penny stock picks, you’ll need to rely on the same charts, tools and indicators to know whether to hold your position or when to sell as you would with large-cap stocks. Charting and analysis methodologies are exactly the same, because the analytical principles in use are equally valid independent of share price or market cap. Monitor your portfolio and your holdings as you always would and stay abreast of news and market developments so that you remain poised to capitalize on upward trends or minimize a potential loss when the signs indicate that it’s time to make a move.

What’s the bottom line on penny stocks? They’re really no different from any other kind of equity, and you probably already have the knowledge and skills necessary to reap the rewards of penny stock trading. The costs of getting in are minimal, and the potential is unlimited. Start your engines!