Penny Stock Trading 

Online Penny Stock Trading

Online stock trading with penny stocks is exciting. Penny stocks are shares from very small companies with a stock value of less than $5. These stocks are considered as highly speculative because they usually don't trade on listed exchanges but over-the-counter on the OTC Bulletin Board or in the Pink Sheets. But they are very profitable too. So how to invest in penny stocks you ask?

Another term used is “microcap stocks” which also refers to very low-priced stocks of companies with low capitalization and limited assets.

Penny stocks are not bad stocks by nature but there are some important differences to listed stocks. When a stock is listed on reputable exchanges like the NYSE (New York Stock Exchange) or NASDAQ then the companies had to meet and maintain some listing requirements. These requirements include a minimum of shareholders, capitalization and periodic reporting about the company's situation, including the financials.

Penny Stocks or micro-caps have only very few requirements, if any. This means that information about the company, its products and services, its financial situation etc. can be difficult to obtain and to verify. That makes penny stock trading more risky.

The low public interest in penny stocks together with the limited number of shareholders can result in a very low liquidity of the stock. This means that you probably can't sell the stock when you want to. Often there is no market at all.

Since the liquidity is very limited, the stock price is open to big volatility. Within days the stock price can change several hundred percent. At the same time this is one of the main reasons why an investor considers a penny stock.

Another reason why investors want to buy penny stocks or microcaps is the possibility to acquire a significant share of the company a with relatively small capital. They so can become a major shareholder.

Penny stock trading is also targeted by speculators who like the chances for huge profits with limited use of capital. Since the price of penny stocks is so low, many shares can be acquired and a little price move can result in a big gain already.

On the other hand a big loss can also happen very quickly. If you consider penny stocks, then use risk capital only, money which you can afford to loose. Many penny stock companies don't succeed and file bankruptcy.

Penny stocks are also often subject to fraud and scams. The lack of information, public interest and liquidity makes it easy for fraudsters to manipulate stock prices or information. The SEC does not overview the activities of the Pink Sheets at all. OTCBB companies must at least file financial reports to the SEC but the SEC can't guarantee their correctness.

I hope I could answer the question how to invest in penny stocks. Although online penny stock trading is very popular, these kind of stocks and other microcaps are for experienced investors only who know how to obtain and verify information about a company and who have the risk capital to invest into these volatile stocks.