A Penny Stock is a publicly traded stock at a very low price, usually under $ 5 or even under $ 1. these stocks are generally associated with small businesses and being so cheap, they represent an opportunity for huge gains. The downside is that penny stocks lack liquidity and the companies' weak market positions and fragile financial balances make them risky investments, subject to total loss. It is best to buy these types of stocks without a broker, as they are not traded on major indices such as the NASDAQ or NYSE. The speculative nature requires first-hand control, which is best achieved with an online brokerage service.
Steps
Step 1. Determine if penny stocks are suitable for your investment strategy
Companies whose shares are traded at low prices tend to be very fragile and can easily go out of business, leaving you with worthless stocks. These stocks, therefore, are a gamble with great risks and great rewards. These are not long-term investments, instead they serve to make speculative gains in the short term.
Step 2. Open an account with an online brokerage service
Buying these shares without the help of a real broker means using a no-frills online service. Sites like E-Trade and TD Ameritrade will allow you to open an account with a small deposit to shop and pay costs. These sites work well for penny stocks, because trading these volatile stocks means having to constantly monitor their price.
Step 3. Make sure you understand how “Over the counter” stocks work
Penny stocks are not traded on major indices, they are traded "off the list". Instead of being traded at a single price, you will have to buy them at an ask price and sell them at a sell price. The purchase prices will vary according to the sellers, and to earn it is necessary to cover the gap between buy and sell prices.
Step 4. Research companies before buying their shares
Buying penny stocks often means investing in small, emerging companies. While it will be difficult to find a lot of information about them, it is crucial to examine their health before investing. You can find financial information about many small businesses on sites like Google Finance or Yahoo Finance. For specific information on the off-list penny stock market, use services such as the OTC Bulletin.
By investing in penny stocks you risk being scammed if you don't first examine the health of the company. A common tactic used by scammers is to buy large amounts of stock in a stagnant company and then advertise that company as a good investment. The scammers then sell the shares at a higher price, while the stock will soon collapse
Step 5. Buy penny stocks with your preferred method
Once you understand the mechanics and risks of this investment, you can get started. Place buy orders with your online brokerage service. With penny stocks it is better to use limit orders rather than market orders. Using limits will allow you to carefully control the price of your transactions. Using market orders can lead to buying stocks at higher prices or selling them too low, as many buyers and sellers will enter unrealistic prices.
