Penny Stock Trading
Dec 7th, 2009
In the world of stock trading gurus one of the most common sales pitches is about the enormous gains that can be had by trading penny stocks. The mechanics of penny stock trading are nearly identical to those of any other stock. The main difference is that the price per share of penny stocks is defined as under five dollars. This is a change from the former cut off of one dollar per share. Common wisdom dictates that penny stocks are a more risky investment than higher priced stocks. Penny stocks often have low trading volumes and the potential for certain types of market manipulation. The low cost stocks that trade on the Over the Counter (OTC) market are particularly susceptible to this possibility. This is not supposed to be all doom and gloom, there are plenty of interesting companies that are classified as penny stocks. Many smaller companies and start ups are traded for pennies a share. There have been many fantastic companies that have spent time as penny stocks.
When you are introduced to penny stock trading you will invariably be bombarded with stories of huge profits and easy money. There is money to be made trading penny stocks, it’s just not easy money. Even if you discount the possibility of market manipulation, the fact that the stocks are so cheap to begin with means that any move in the price of the stock is a huge percentage move. Take the example of a stock moving in price by $0.05. If the stock is worth only $1.00 to begin with then it has moved 5% in a day. This type of movement is not uncommon in the penny stock trading world. Of course the opposite move could happen just as easily.
Keep in mind that the risks involved with penny stock trading are higher than trading more established stocks. When I do trade penny stocks I trade only stocks on one of the major exchanges. I very rarely trade anything OTC or pink sheet. One thing to keep in mind when you are trading the cheapest stocks is the commissions you are paying. Often your broker will charge a fee for buying stock under a certain dollar value. Couple that with the possible fees for buying large quantities of shares and you have a recipe for extremely high brokerage fees. Try to find a broker that will charge a flat rate for unlimited shares, and make sure to read the fine print about other fees.
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