A Little About Penny Stock Trading

The term “penny stocks” is a bit of a misnomer. Although most of them do come cheap, quite a few of these micro-caps may be valued at dollars apiece instead of cents. Stock investors love them because of their incredible earning potential. It’s the classic case of a high risk, high reward opportunity. In the hands of an experienced trader, a few good penny stocks can lift the entire portfolio up significantly, often in a matter of hours.

Penny stocks are what people in the business loosely call shares from relatively small companies with sub-300 million dollars in total capital. This would include most of the start-ups.  They are bought and sold quickly based on Pink Sheet quotes – a list made by privately held OTC Markets Group-Inc. The majority of the shares can be had for less than $5 each, with some trading for less than a dollar. Some industry giants were once part of this group, like the tech behemoth Microsoft.

Making an investment in penny stocks is not that complicated. The same rule applies to these and the more expensive blue chips. Stock brokers can trade them for clients for which they earn a small percentage as commission. Opening an account can be done with just a $500-$1000 initial investment. This amount can already purchase a good number of shares since penny stocks cost so little.

Blue chip shares are relatively stable so it takes a while for stock holders to make money out of them. Penny stocks, on the other hand, can swing widely over a short period. This is why traders on the lookout for big gains are willing to gamble their money on these stocks. If they get lucky, they can double or triple their money in a single day, and it’s not as rare as one would think.

While the trading itself is uncomplicated, successful trading on a consistent basis requires an enormous amount of skill and experience. Predicting the wild swings of the various penny stocks is easier said than accurately done. One must know when to push and when to hold back. If a trader gets too excited with his winnings, he may not stop until he loses it all again in a single round. It is not for the faint of heart.

Those with temperaments suited to challenging and fast moving trades will enjoy being immersed in penny stocks investments. Others who prefer a safer route towards money-making however are more suited to mutual funds and investing in blue chip stocks.