Penny Stock Basics

Trading penny stocks can be very lucrative but at the same time it’s not for everyone. First, let’s define a penny stock. The SEC categorizes a penny stock as a security issued by a very small company that trades at less than $5 per share and is generally quoted on an over-the-counter exchange (often listed on OTCBB or Pink Sheets). There are many growing, lesser-known companies that trade as penny stocks and have the potential to see significant growth in both revenue and stock price. At the same time, penny stocks typically trade with higher volatility and risk and a trader should be aware of that prior to entering a position. Traders should look at penny stocks as more speculative in nature and only risk funds that they can afford to lose. Like any other stock you might buy, you can purchase shares of penny stocks through most standard brokerage accounts including Etrade, Fidelity and others.

The allure of penny stocks is that you can invest smaller amounts of money with potential for greater percentage returns than in large cap stocks. Due to low share price, penny stocks allow a trader to leverage their capital and enter bigger positions with expectations of capitalizing on larger percentage price fluctuations. Moves of 100% in a day or 1000% or more within weeks are not unheard of but certainly not the norm.

It’s highly recommended that a consumer do their research on company before trading or making an investment in a penny stock. There are many variables that should be looked at including company history, news releases, stock chart and other related information. Depending on which exchange a penny stock is listed, it can be difficult to gather this information due to lower standards required from some exchanges. Do your due diligence as trading penny stocks comes with great potential for profits or loss.