The popularity of penny stocks has increased, but you could lose a lot if you do not use the right strategies. Penny stock investing is an exciting way to make money with little risk.
Since big stock exchanges such as NYSE and Nasdaq require that penny stocks meet listing requirements, including a minimum share price, penny stocks often trade away from the major market exchanges.
With penny stocks, liquidity can be a major problem; investors can become stuck in a position for several days or weeks until there is enough supply or demand to enter or exit.
However, it can be difficult for new investors who are just starting out. This article will help you understand how penny stocks work and what you need to know before you invest in them.
What Are Penny Stocks?
Penny stocks are risky because they’re usually low-priced. These stocks typically trade below $5.00 per share.
Many of these stocks are relatively new, or lack an established track record. This means that there isn’t much information about how well they’ll do in the future. Investors should be wary of investing in penny stocks.
The best way to invest in a penny stock is through a brokerage account. Brokerage accounts allow you to buy and sell securities without paying commissions. You can also use margin trading to make your investments more profitable.
Margin trading allows you to borrow money against your investment portfolio when buying penny stocks.
When you do this, you have to pay interest on the borrowed funds. However, if your investment goes up in value, you won’t owe any additional interest payments.
OTC Penny Stocks
You may have seen the movie The Wolf of Wall Street starring Jordan Belfort. A penny stock called the Pink Sheets is traded in that movie.
Well, penny stocks are very risky because they can go down quickly. Many people lose money when they buy them. Some companies don’t even make any money off of them.
People who invest in these stocks usually do not understand what they are doing. They think that if they put more money into the company, then the price of the stock will rise. This may happen but it also might fall. When this happens, they lose everything.
Penny Stocks are risky investments. If a company is unwilling to provide full financials it will trade on the OTC markets. These companies may be less liquid than listed stocks.
Trading these stocks is difficult due to the lack of regulation. Penny stocks are very volatile and can move quickly.
The Penny Stock Tiers
Tier 1 Penny Stocks
Their shares are usually listed on a major exchange like the NYSE or NASDAQ, and their prices are usually below $5.00 per share, although sometimes they are slightly higher.
Unlike OTC penny stocks, Tier 1 penny stocks are potentially risky, but less susceptible to exploitative practices since exchanges require greater transparency and depend on them to a higher caliber than OTC penny stocks.
Tier 2 Penny Stocks
According to our definition, penny stocks are stocks with a price of between one cent and 99 cents. They aren’t less than a penny (stocks are sometimes traded at fractions of a penny, as you might know).
There is a tendency for stocks to trade in the range of 1 cent to 99 cents when they are traded on the NYSE or NASDAQ.
An official letter will typically be sent to these companies, telling them that they must meet certain criteria in order for their stock to rise above $1.00 within a specific period of time.
In that case, the stock will remain listed, but if they cannot, it will be delisted and moved to the OTC market exchange.
It’s very important to note, however, that stocks trading above $1.00 can never have a spread under a penny.
In other words, it will trade 1.01×1.02, or 1.05×1.06, but never 1.150×1.017. Stocks will trade down to fractions of a penny when they trade below $1.00.
Tier 3 Penny Stocks
Sub-penny stocks are those with a share price of less than a penny. Their share price begins at .0099. Therefore, we would not trade them since they are not listed on the NYSE or NASDAQ.
The companies aren’t particularly noteworthy beyond the fact that their stock has a price of 1 penny per share because they aren’t strong enough.
Tier 4 Penny Stocks
Trip Zero Stocks (Priced .0001 – .0009) Trip Zero Stocks have three zeros in the price. Their price range is .0001 – .0009. These stocks are frequently used for manipulation, as you might expect.
As the stock moves up, each increment represents a 100% increase from the entry price of .0001.
There are many “hot penny stock” alerts that are on sub-penny stocks and trip zero stocks, which generally benefit the people that first bought the stock.
A 100 mil share buyer would make a profit of $100k if the stock went up to .0010 from .0001. It is common for people who hold large positions in penny stocks to send stock promotion newsletters.
Do You Think It Is Worth It?
Penny Stock Traders are the biggest losers in the stock market. Only 10% of them will be successful.
Many who get involved in this type of investment lose everything. Some people tend to get given the idea by a friend who had been successful with a similar system.
You can apply what you learn to day trading penny stocks and small cap stocks. This helps become successful in trading these types of stocks.
What You Need To Remember
Penny stock traders need to use a scanner to find out which stocks will move up. This requires specialized software that is used to scan thousands of companies and identify those that meet specific requirements.
Small cap stocks that gap up before the open are often catalysts for big moves.
Penny stocks that gap up more than 50% are likely to make a big move. Stocks are gapped up because of some kind news catalyst like FDA approval.
We want to avoid stocks that are being bought up because they usually don’t move down after being purchased.
We want to buy stocks that are trading below $10 per share. This is because when the float is under 10 million shares, there is less demand for the stock. This means that if you buy the stock, you may get a higher price than your original offer.
High relative volume means that there is a lot of interest in the stock. This often indicates that the company has something new to announce.
A stock may also go higher after breaking out over premarket highs because investors think the price will continue rising. A bull flag pattern is when a stock breaks out over premarket highs but then quickly reverses direction.
When you buy shares during a bull flag, your investment gains momentum as the price rises.
Frequently Asked Questions
Which Ex-Penny Stocks Are The Most Famous?
US One of the most famous penny stocks of all time is Apple, one of the most famous ex-penny stocks that have become legends in their own right.
iPhone maker’s shares traded as low as $5 as recently as 2009. These items changed hands today for at least $171.70 each.
What Makes Penny Stocks So Appealing?
Penny stocks are attractive for a number of reasons. In exchange for a small investment, investors can expect a high return. If a stock rose to 50 cents a share, an investor who pays 25 cents per share would double their money.
Summary
Trading penny stocks isn’t for everybody. You must be willing to take risks and learn fast when things go wrong. It takes skill to know what to do when things go wrong.
Money management techniques are important to protect your investment. A trading simulator is useful to practice before investing real money.
Financial Disclaimer
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