According to the Securities and Exchange Commission (SEC), penny stocks are securities of small companies that trade at less than $5 per share. These types of penny stocks are typically quoted “over the counter” on an exchange such as the OTC Bulletin Board or OTC Link.
The thought of making money with penny stocks may sound like a great idea at first but it’s important to know what you’re getting into. Furthermore, it’s important to know who actually buys penny stocks. These types of investments are highly speculative and the odds of losing a large sum or all of your investment in a penny stock is quite real. Millions of people are still trading penny stocks and buying shares in these micro cap issuers every single day.
Let’s break down the different types of penny stock investors and what their strategies might be:
Corporate Insiders: When it comes to penny stocks, many corporate insiders like management and key advisors will buy into shares of the company’s stock. This is usually a sign of confidence in a company. On the flip side, it isn’t unlikely to see insiders dumping their shares of penny stocks either and in many cases, this amount of selling can easily outweigh the buying in a penny stock. Some of these insiders may even try to manipulate a penny stock, so it’s important to know what kinds of insiders the company is dealing with when you look for penny stocks to buy.
Experienced Penny Stock Traders
These are the gritty day traders that live in the trenches of penny stocks. They study penny stock charts, penny stock news, and even penny stock discussion boards. This is done in order to make the best possible strategy for trading penny stocks. For this
Penny Stock Market Makers
These are the gatekeepers to the securities traded on the exchange. Market markets are broker-dealers who facilitate trading in a penny stock. They do this by showing the bid and ask quotations for a given number of shares. These market makers provide liquidity to the penny stock market. They end up becoming a major contributing factor to the day trading of penny stocks.
This is the blood of the penny stock universe. Since many penny stock companies are early stage start-ups, it has generally been known that it’s all about the potential of what these companies could become. These traders speculate in the hopes of repeating the successes of some of their earlier victories. They’re also trying to find “the next Apple or Facebook”. Losses don’t usually deter these investors as they are aware of the risks of speculating.
What Kind Of Penny Stock Investor Are You?
The bottom line is that there are countless people who trade penny stocks or buy penny stocks to make money. Though there are risks involved, its up to you as a smart investor to decide if those risks are worth the potential reward.