Investing in the stock market has always been one of the best ways to grow your wealth and maintain your money’s purchasing power over the long-term. While many people are aware of the potential that lies in investing in big companies that trade on the New York Stock Exchange and the NASDAQ, fewer are aware of what stocks lie outside of the mainstream. Thousands of companies trade in other ways and they actually represents a large portion of the economy. Many of these companies trade for only a few cents per share and they represent a fantastic opportunity for the average investor to get involved. These stocks, known as penny stocks, carry with them some vast potential, but they can also be dangerous to the untrained investor. If you’re looking for some other way to invest in the stock market besides putting money into the S&P 500 companies, penny stocks are something that you should check out. Here are a few things to keep in mind if you are a beginner with penny stocks.
You’re Buying Ownership
One of the mistakes that many getting investors make is that they liken penny stock investing to gambling. They think that all they have to do is pick the right stock symbol, buy some shares of that symbol and then wait for it to go up in value. When you get involved in penny stock investing, you are actually becoming an owner in a company. For each share of stock that you buy, you are buying a piece of the company. This means that you own a piece of each chair, each desk and each piece of inventory that the company owns. If you think of each share of stock as a share of ownership, you’ll likely put more care into how you buy and sell your shares.
What Makes a Penny Stock?
If you are unfamiliar with penny stocks, you may be interested in an official definition of what a penny stock actually is. It does not necessarily mean that every stock traded in this category is traded for a single cent. Instead, the definition typically includes any stocks that trade for less than $5 per share. This includes thousands of companies. Many of the companies are very large and represent names that you have probably heard of in every day life. This means that you can get some really good companies in this niche.
Where do They Trade?
Although you may understand the basics of how regular stocks trade, penny stocks do not exactly trade in the same way. For example, with stocks are traded on the New York Stock Exchange or the NASDAQ, you can trade and through an electronic exchange that is monitored in a central location. With penny stocks, you instead trade them through the over the counter bulletin board or Pink Sheets. With these options, there are a few different electronic exchanges that you could trade the stocks with.
A number of online brokers give you access to trade penny stocks from your computer. Many of these brokers simply own shares of the companies that they allow you to buy. Then when you place an order, they give you some of the shares that they already have at the current market price. Then when you want to sell, they simply buy the shares back from you at the market price.
Penny Stock Market
When trading in the penny stock market, it is important to realize that the prices of stocks can be different than what the current ticker price says. This is because the penny stock market has very low numbers of shares for each stock. Instead of the millions of outstanding shares that are available in the bigger stock markets, you might only have a few thousand shares of a company in the penny stock market. Because of this, the price quotes that you see may be out of date. This means that you have to be a little bit flexible when it comes to getting your orders filled.
Due to the relatively low level of liquidity in the market, some stocks can be very volatile. This could work in your favor or it could work against you as an investor. For example, when a stock in this market get some media attention, it could attract a few investors to the company. Once at the investors get involved, it could artificially drive the price of the stock because there are many more buyers than there are sellers in the market. On the other end of the spectrum, if the company gets some negative media attention, it could result in the opposite situation. When more sellers are involved in the market and buyers, it can drive the price down quickly. As an investor, you have to be willing to put up with this volatility if you want to get involved in the market on a regular basis.
Researching Penny Stocks
Researching penny stocks is not exactly like researching stocks in the larger stock markets. Many of these companies do not adhere to the same reporting requirements as the bigger companies. Because of this, you may not be able to get consistent information from one company to the next. This means that you will have to rely on information that has some holes in it. It may be difficult to come up with realistic assumptions about a company.
Many people who are interested in penny stocks rely on other sources for their research purposes. For example, there are a number of penny stock newsletters or tips services that help customers by doing research and then sending out these picks to subscribers. These services can be helpful, if they have their subscriber’s interests in mind. In many cases, these companies are only offering their services to make money. They not only make money on the subscription fees from subscribers, they also make money by investing in the stocks that they recommend before they recommend them.
For instance, some unscrupulous subscription services buy random penny stocks and then send out a recommendation to buy that penny stock to their list. Many of the investors on the list then buy that stock because the newsletter told them to. When this happens, it inflates the price of the stock and the company that issued the newsletter then sells their shares after the price has been inflated. Most of the investors are left holding the stock as it declines in value again.
If you’re going to rely on someone else to do your research for you, you have to take the risk that comes with it. You never really know who you can trust, unless you dig deep to find out about the company providing the information. If the company has a good track record and most subscribers are happy with their services, then you might feel more comfortable about listening to what they have to say. If you subscribe to one of these services, it is usually a good idea to sit on the sidelines and see how their performance turns out before placing any of your own trades.
Once you find a way to research penny stocks, you can begin investing and making solid returns. Just make sure that you understand the risk that is involved with this form of investment and plan accordingly with help from the experts at Penny Stocks 1-2-3.
