The Basics Of Trading Penny Stocks

By: Robert Thomson


Why Trade Penny Stocks?

There are many reasons why a trader may get involved in penny stocks.

Sometimes a new investor will want to learn the basics of buying and selling shares, and low-priced investments seem to be a good place to start.

Sometimes an advanced trader will get involved in these speculative issues to hedge a position, or play with some risk money.

Perhaps you may even have inside knowledge of the prospects and potential of a company you work at, and you would invest in their stock before the business really takes off.

Penny stocks are fun and exciting, which is why some people get involved. Kind of like a high-stakes hobby.

Based on my experiences from many years in the industry, the main reason people get involved with penny stocks is to try and get rich.

Of course, any combination of the above factors can act together to drive people into the penny stock markets.

What are your reasons for getting involved in penny stocks?

-Excitement / Enjoyment.
-To make money.
-You have some inside or specialized knowledge that you can profit from.
-You have a strong belief in a concept or idea of a company, you think the stock will explode in price.
-You don't want to miss the boat, while others are getting involved.
-You want to increase your portfolio's risk/reward exposure.
-To learn the ropes of penny stock trading, or just of trading in general.
-You think you know how to pick winning stocks.
-A more expensive stock you held took a price dive, and now you are holding a 'penny stock' unintentionally.
-To increase your portfolio's diversity and exposure to certain sectors For the purposes of hedging strategies.
Are Penny Stocks For Me?
The suitability of penny stocks as an investment vehicle will depend on many factors, and only you can ascertain if they are appropriate for you. Factors affecting your situation will include, but will not be limited to:

-Your risk tolerance
-Your financial and investment position
-The aggressiveness of your trading goals
-Your expectations of returns
-Your level of investment experience.

Getting Started In Stock Trading
If you're unfamiliar with trading on the stock market, this page is for you. For those who have never bought a stock, but have some money they'd like to invest, we've put together this quick overview to help you get started.

Brokerage Accounts
Every investor needs a stock broker to handle buy and sell orders. The first step is to decide which kind of firm will work best for you. Do you need one that offers full service, or can you go with a discount brokerage firm? Please read on and decide.

Full Service Stock Brokers
The advantage of a full service account is that you'll get more personalized attention. The broker will understand what your investment goals are and can offer recommendations on what and when to buy and sell. However, because their commissions can run as high as $100 a trade, this type account works best for those with high net worth and/or minimal trading activity.

Full service brokers are not a good fit if you want to trade in penny stocks because you'll be investing smaller amounts of money and doing it more frequently. The high commission fees involved would take a huge bite out of your potential profits. Instead, we recommend using a discount brokerage firm.

Discount Stock Brokers
Discount brokers do not offer the same level of service, but they're still available to answer your questions. You've probably seen the television ads for firms that execute trades for the low fee of ten or twenty dollars. With commissions that low, naturally it's going to leave you with more money to work with.

Other discount brokerage advantages include online account access via computer or an automated telephone system. From your computer, you can monitor your account activity, keep track of open orders, and get relevant market information and stock quotes. This is a great benefit to penny stock investors because of the 24/7 access.

Setting Up The Account
Once you've chosen a broker, have them walk you through the necessary forms for opening your brokerage account. It's very similar to setting up a standard bank account where you're expected to make an initial deposit of cash. Accounts are typically up and running in about three days.

This account will hold all your trading assets, whether cash, stocks, or bonds. The money you have deposited will be used for making purchases. When you sell, the cash from the sale goes back into your account for future purchases.

In the USA, a penny stock is a common stock that trades for less than five dollars a share and is traded over the counter (OTC) through quotation services such as the OTC Bulletin Board or the Pink Sheets. Although penny stocks are said to be "thinly traded," share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated.

There are so many trading offers out there that supposedly have "little-known" or "secret formulas" for finding profitable stock trades. Here’s the most profitable secret you need to know…NO trading method that is "secret" or "little-known" will work. You must come to understand that the very premise of making a profit is making trades (long or short) that everyone else trading. Now think about this. If it’s "secret" then very few traders are using it. It takes more than a few traders to move a stock price.

A really good book to read with no such scams or schemes is www.thestockbible.com . It is a great read that covers almost every area of the stock market today. "The Stock Bible" is a must have if you want to be profitable in todays market.

See you all on the trading floor!

As always,
- Michael Frizzelle

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