Now we’ve probably all seen the film ‘The Wolf of Wall Street’ based on the famed stockbroker Jordan Belfort. Most of us have probably thought we’re a dab hand in sales and could trade penny stocks with no problem. But do most of us actually know what Penny Stocks are?
First Things First
Firstly we need to have a very basic understanding of stocks, shares and the stock exchange. Let’s start with a company that needs to raise its capital, they would issue shares and allow people to buy them for a certain price, this price throughout time can either rise or fall depending on the companies’ actions and decisions. These stocks and shares are traded at a stock exchange like the New York Stock Exchange, these days everything is done by electronic transfer. If a stock doesn’t trade on a listed exchange it can be traded over the counter (OTC). This is a less formal and less regulated form of trading, with companies than have cheaper stocks but much higher risks.
What is a Penny Stock?
Penny stocks are shares issued by small companies that trade at $5 per share and below. The majority of penny stocks don’t trade on large stock exchanges like the NYSE bar a few, they mainly trade over the counter. This is done either electronically or using privately owned pink sheets. Unlike the large stock exchanges, OTC doesn’t have a trading floor and all quotations are done electronically.
Further Explanation
In the past penny stocks were known for exactly as they are named, pennies. The stock price would be anything up to $1 and anything over wouldn’t qualify them as a penny stock. The SEC (Securities and Exchange Commission) has since then changed the definition of penny stock to $5 per share. The SEC is responsible for protecting investors and maintaining the orderly function of the markets.
Penny stocks are nearly always associated with small businesses and don’t trade very often, this means there aren’t many buyers for the stock, or the company has low liquidity.
Because of the size of the small companies and their lack of liquidity, penny stocks are usually considered high risk. This isn’t always the case though, using a guide to penny stocks will help you understand what’s best to invest in and help you understand the risks involved.
Why Do I Need to Know About Them?
Here’s the thing, unless you’ve trained for years and done the research required to become a stockbroker, the chances are you aren’t going to find yourself on the trading floor making million-dollar trades. Unless you can invest millions of your own dollars to play with, you won’t find a firm willing to take you on the play with theirs.
Penny stocks allow you to trade your own money and be able to have a glimpse of the trading floor feeling, without the risk of losing millions of dollars in 3 seconds.
How do I Start?
If I’m being completely honest, I wouldn’t start playing around with trading any of your hard-earned cash without genuinely understanding the markets and how they act. So to begin with there are plenty of ways you can practice, get to know the market and ensure you don’t make any silly trades.
Paper Trading
This is a brilliant way to look at the real market and make trades with literally zero risk, get yourself a pen and some paper and write down any trades you think would be worth investing in, then we wait and see whether it pulls off. Do this for as long as you need until you feel comfortable to move on to either real trading or virtual money.
Virtual Money Accounts
Here is a brilliant way to experience the full risk and reward of making trades on the stock market, all without putting any of your own money down. It’s a brilliant way to learn how electronic trades work and will give you more confidence and a better insight into the stock exchange before investing.
What Companies Should I Invest in?
Here’s the major question that’s asked by every stockbroker on the planet, who should I invest in? Most people work off tips and will invest heavily into something they’ve been told about, but when it comes to Penny Stock we should be wary of tips given by anyone that isn’t in the market themselves. Most of the time if you’re hearing about a tip, so has everyone else, and by that time it’s too late to make any money from trading their shares.
Chose an industry you’re passionate or have some knowledge about to trade-in instead of something you think will make you the most money, this way you will be able to see if a trade is worth investing in. This is often an overlooked advantage people don’t know they have.
Once all your research is done and you’re happy to invest in some Penny Stock you can begin. I’d recommend having a pot of money that you have assigned for trading, if it’s gone, it’s gone. Until you can afford to reinvest some more money.
Remember you’re investing because you want a return, Penny Stocks are usually a quick turn around the deal and you should evaluate if the stock you’ve chosen truly has the potential to do well. If everything checks out then good luck and enjoy your new hobby as a Penny Stock trader.