About Penny Stock Trading

If you are interested in getting involved in the stock market—that is, investing in shares of companies that are expected to bring in a profit—there are a few choices you need to know about. You need to decide whether to invest in penny stocks or the more expensive standard stocks.

The legal definition of a penny stock is any stock that is not traded on one of the major stock exchanges, such as the NASDAQ or the New York Stock Exchange, and that is fold for less than $5 per share. This may be because it is too small a company to qualify for these exchanges, or because the stock is so inexpensive that most traders do not wish to deal with it, since they will make very little money off of it.

However, amongst brokers and other stock-market experts, the term “penny stock” has a pejorative connotation, as though these smaller stocks were less worthy of the name than other stocks. Because of this mainstream stigma, and because of the lower cost of these penny stocks, most brokers will not get involved in penny stock trading.

This is where you have to make another choice about your penny stock trading. You can search around and attempt to find a broker who will work with you, or you could go through a discount brokerage house.

Discount brokerages specialize in penny stock trading. This trading is done on exchanges known as the pink sheets, or on the OTCBB, and the stocks are traded for $5 per share or less. This can be very risky trading, since these stocks have not been rated as high-performing, there is not always information revealed to the public, the OTCBB and pink sheets do not hold stocks to minimum standards of performance and quality, new stocks have no history, and the company you’re buying into may not have access to enough cash, therefore can’t always sell their shares even after they put them up for sale.. However it has also been known to produce excellent returns for many people, and the higher risks can be worth the higher rewards.

One problem with penny stocks, however, is that they can easily be fraudulent. A company can manufacture a history or a series of ratings that are not authentic but still seem attractive, then sell millions of dollars worth of penny stocks. By the time investors realize that their stocks are worthless, the fraudulent company has moved on or covered itself legally, leaving the investors with major losses. If you decide in favor of penny stock trading, it is a good idea to have a professional thoroughly examine the history of any stocks you do buy.

Penny stock trading is not for everyone, but it can be a useful and lucrative way to begin stock market trading. Many beginning investors use it as a means to learn their way around the stock market and to become more skilled at the practice of trading. If you are prepared for the risks, penny stock trading may be an excellent choice for you.

Copyright © 2008 Paul Mac Donald