Penny stocks are low-cost stocks, usually under $5 and often under $1 a share, with a relatively small market capitalization. Capitalization is a company’s outstanding shares multiplied by share price. The definition for “small cap,” the term commonly used to denote small capitalization, varies from brokerage to brokerage.
It’s an approximation, and it changes over time. According to Investopedia, the advantage of investing in small cap stocks is the opportunity to beat institutional investors to the market. Mutual funds are restricted in the proportion of one company’s outstanding shares they can own; generally, they can’t invest in penny stocks.
While the Securities and Exchange Commission (SEC)considers anything priced under $5 a share penny stocks, and some stocks trading on big exchanges like the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ) are priced under $5, penny stocks are not normally traded on exchanges. They’re traded over the counter or through day-trading.
Penny stocks are the untamed wilderness of Wall Street. Tales of scams and corruption abound. It’s difficult to find accurate information about the value of companies with penny stock shares. The SEC warns penny stock investors not to buy unless they’re prepared to lose their investment.
That doesn’t mean it’s impossible to find good investments.Successful traders of penny stocks advise constant attention to your portfolio and a serious investment in research on the companies you back.
One of the most common scams played with penny stocks is the “pump and dump” scheme.Sellers of a stock invest in it, pump up the value by promoting it aggressively, and then dump their shares when it reaches a high point. They earn money, but most of their investors lose.
Recognizing common scams in the penny stock market means youmay be able to take advantage of selling high. You can’t do that without constant attention.
While you’re learning, heed the SEC’s warning; you may well lose before making a profit. That means you should only invest what you’re ready to lose.
Investing in penny stocks is a gamble. It’s definitely not a long-term investment panacea.
With that in mind, and a small day-trading budget, perhaps $500 to $1,000, you’ll need to seek out companies that are underappreciated. Penny stocks with a big buzz around them are often overvalued. They’re the ones being pumped up. You’ll need to do some digging to find companies that have solid fundamentals, great potential and a good earnings history.
Look for penny stocks that pay dividends. They’re less risky because you get some money back even if the stock tanks in the end. If you’re watching carefully, on a daily basis, you can get out before the bottom drops out from under you.
If you have the time to invest in research and money you’re prepared to lose, you just might win big.