How to Invest in Penny Stocks

You’ve seen and heard it all before. The hype, the gimmicks, the glory, and even some fraud – penny stocks are a risky business. You know this. You like to play with fire. Pink sheets and penny stocks have been a part of “get rich quick” schemes for decades. But are all penny stocks scams?

Not at all! Investing in penny stocks is risky, but it can be highly profitable when executed by an intelligent trader. Many beginners think investing in these stocks is a great idea because they offer low share prices. In fact, penny stocks typically come with more risk. As such, only professional and experienced traders should focus on making big bucks on the pink sheets.

What are Penny Stocks?

So we didn’t scare you away from one of the riskiest, but potentially lucrative investment ideas? Then let’s get started. Most define penny stocks as any stock with a share price that’s under $1 USD. The SEC considers any stock under $5 USD to be a penny stock. Penny stocks rarely, if ever, cost just a penny per share.

The majority of penny stocks can’t trade on the NYSE or NASDAQ. As such, many investors don’t even consider these investments. Plus, most consider the wide world of penny stock pimping to be the Wild West of Wall Street. It’s unhinged, volatile, and unpredictable.

Still here? Well, then let’s talk about where you can buy these types of stocks. Typically, investors buy penny stocks on the Over-the-Counter Bulletin Board or OTCBB. Some penny stocks can be found on pink sheets, too. While the OTCBB is register with the SEC, the pink sheets are not. What does this mean for the average investor? Pink sheets are pretty darn risky.

Understanding The Risks

Not to harp on the risky business of penny stocks, but you need to understand the inherent risk when trading penny stocks. So here’s why these investments are pretty darn risky:

• No Minimum Standards: There’s no safety cushion with penny stocks. No minimum standards are required to remain on the OTCBB.

• Little Liquidity: It can be difficult to find someone who wants to buy your penny stocks. Often, a seller will have to lower the price of the penny stock to find a buyer. This typically means profits are unavailable.

• No History or Information: Penny stocks are not traded like regular stocks. There is no stock exchange that requires filing with the SEC. This means penny stocks are not publicly scrutinized. Trading stocks often boils down to betting on the success of a company. With a penny stock, you have little to no information to place your “bet” on.

How to Invest: Step by Step

If you’re still reading this guide, then I assume you’re pretty interested in penny stock investing. And there can only be one reason for that – you want to make the big bucks. You understand that while there is inherent risk in penny stock investing, there’s also a huge upside. You can make a lot of money quickly by placing your bets properly and playing the pink sheets.

So here’s how to do just that:

Open a Brokerage Account

You need a way to make transactions quick and easy when investing in penny stocks. Online brokerage accounts offer just that. You get easy access to penny stocks with little fees and commissions.

Find a brokerage account that gives you all the information you could ever need about making the best investing decisions, especially with regards to penny stocks. You’ll want to look for charts, pricing throughout the years, and other analytical features.

Analyze Penny Stocks

Before you put some money down and invest in penny stocks, you’ll need to do some homework. You need to analyze the market. Most agree that penny stocks have low price points due a certain set of circumstances. Your job is to analyze why the price is low and place bets according to the upside.

When studying the penny stock game, remember to avoid hype. Any stock emailed to you by an “adviser” with a 40,000 person email list is not something you want to invest in. The “pros” keep the good stuff to themselves. They don’t send it out to everyone under the sun in an email.

Choose a Trading Strategy

No matter how you decide to invest in penny stocks, you’ll need to complete a technical analysis of the company. Do NOT let the management of a company take care of this for you. You’re never going to get reliable information if you do this. This must be done before you choose a trading strategy.

Investing 101

Now you have some analysis completed, so it’s time to find a trading strategy and hopefully, make some cash. While the penny stock game is varied, here are a few tips to help you succeed:

Never Short Penny Stocks: It’s rare to see someone short a penny stock and make some decent change off it. You’re much better off “longing” a penny stock than shorting them.

Buy & Hold: This is another risky strategy with penny stocks. Holding some penny stocks can be exceptionally profitable, as there is a lot of room for growth. However, many a penny stock goes bankrupt –which wouldn’t be great for your investment.

Sell Quick: Many an expert penny stock trader has employed the churn and burn strategy with these investments. They buy and sell rapidly, then take home a quick profit. This may be the best strategy for beginners, too.

High-Volume Stocks: Until you have some experience, it’s best to work with penny stocks that trade more than 100,000 shares per day. You should also focus on stocks that cost over $0.50 per share. By following these two guidelines, you’ll minimize any loss as you start trading.

Final Step: Profit

Once you’ve done your research, analysis, and picked a trading strategy – it’s time to buy. Select the stock you want, choose how many shares you’ll buy, and purchase a bid from your online broker.

Now you know exactly how to invest in penny stocks, and maybe even make a profit. No promises here, though! The penny stock market is volatile and takes time to master. Just remember…

Never fall in love with a single penny stock. Remove emotion and think as rationally as possible when investing.