Pros and Cons of Investing in Penny Stocks

Most penny stocks are shares of small companies that usually don't have great market penetration.The main difference between stocks and larger stocks is that they fluctuate enormously on a daily basis. When you decide to invest in the right small or large cap company, make sure you limit your order. While the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies. Penny Stocks on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange. Stocks are not found in the typical markets that most stocks in your portfolio might be, such as NASDAQ, NYSE and AMEX.

The SEC defines penny stocks accordingly: The term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they may also trade on securities exchanges, including foreign securities exchanges. In addition, stocks include the securities of certain private companies with no active trading market.

Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer's account.

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

Since pennystocks are traded outside the main markets, there's a lot more room for investment from experienced and inexperienced investors. Penny stocks really help you develop a greater understanding of how the market works, from the very finite details and inner workers of the trading counters. Identify what type you want to invest in, micro cap, small cap or large cap companies. These terms relate to the amount of capital each of the companies have, and is a great way to gauge new opportunities or growth patterns. There may be a good place for penny stocks in the portfolio of an experienced, advanced investor, however, if you follow these steps.

Have you ever heard the phrase "the trend is your friend"? Well, with trading penny stocks, identifying trends through technical analysis and buying and selling according to that trend, can prove to be very profitable. Small cap stocks are loosely categorized companies with share prices of below $5 and with market caps of under $200 million. They are sometimes referred to as "the slot machines of the equity market" because of the risks involved. In basic terms, with trend trading, you buy a stock when it is trending up and sell as soon as it reverses that trend or conversely when shorting the stock you short sell it when trending down and cover your position at the point it starts to recover.

Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information because the company isn't required to have independently audited information and is never covered by a stock market analyst because virtually no one would read about it or pay for the information.

As penny stocks are not traded on the main markets, it's important to find a trusted broker or side exchange market to facilitate the purchase of stocks. In order to be truly effective as an investor, you must understand the 'bid and ask' price connection. The difference between the bid (real) and ask (selling) price is called a spread and is the base in which you will calculate your earnings. This is particularly important as stocks are sold by estimated values versus a single unit price. It is wise to install a stop-loss tactic and protect your capital with prudent exit strategies. This is both high risk and high reward. So, it's very important to know what you're doing, and listen to the experts.

And therefore carries a greater risk than your average large stock investment, however, with the potential to make a lot more money. For example, if a stock only cost 10 cents, a 1 penny increase would push a 10% gain.Typically, these types of stocks are sold for $5 or less, in most cases they're under a $1. Stocks are not found in the typical markets that most stocks in your portfolio might be, such as NASDAQ, NYSE and AMEX. Penny stocks are a great way of getting into the market at a low cost. And therefore, eliminates potential loss risks. The logic behind trading penny stocks is that they're far less expensive then their Blue Chip counter-parts.

When researching what stocks to invest in, it's important to do your research. Make sure you know what the company's product is, and how it's used in the marketplace. A limit trade limits the amount you'll pay for the stock or your selling price. If you're dealing with a share that's a penny, then even the slightest movement in price before you buy can cost you all your profit or throw you into a loss. Since activity may be low on these stocks, certain individuals can play with the price of the shares and increase their selling price.

In any case, if you're planning on buying stocks in larger quantities, always make sure to go through a broker. They know the markets and are in charge of handling and selling, so it's best to work with them to maximize opportunity. Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on one of the major exchanges, the company moves to one of these smaller exchanges. More often than not these companies are new or expanding their businesses and this market is a great avenue for investors to get in on the ground floor.

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