How to Begin Your Journey in Penny Stock Trading: A Guide
Penny stocks are those issued by small companies that are usually in the start-up phase of their business lifecycle. In the US these are usually stocks trading at prices that are less than $5 per share. The UK stock market generally regards any stock priced below £1 as a penny stock. Some of them do trade on the New York Stock Exchange (NYSE) and the NASDAQ but many also trade on the over-the-counter (OTC) exchange to enable small companies to meet limited listing requirements.
Brief History Of Penny Stocks
Penny stocks have been in existence since the last 19th century and were also blamed for the crash of the 1929 stock market in the U.S. After 1934’s Securities Exchange Act, a formal definition was brought in. They were not in news until the 20th century and were usually traded over the phone. After the Great Recession, the SEC added penny stocks onto the U.S exchanges along with the foreign securities exchanges.
Creation of Penny Stocks
Penny stocks are created like any other stock process: with an IPO (Initial Public Offer). By filing a registration statement or filing for exemption from registration on the Over-The-Counter Bulletin Board (OTCBB), the company can get listed on the OTC market or a larger exchange if it is permitted. Some companies also choose to go public via a reverse merger.
These companies essentially find a publicly trading company whereby the public company purchases all of the shares of the private company. The result is the “newco” becoming the operating business “inside of” the public company.
The Attraction of Penny Stocks
Some penny stocks are prone to pump and dump schemes and also spoil the sentiment of the market with negative returns. This is part of the risks of buying penny stocks. It’s important to know that these securities are thinly traded. This means that there is less liquidity in the market for most penny stocks.
As a result, they can be manipulated more than shares of companies like Apple or Google. Yet, the allure of high risk and high reward is too high to resist. While they may be hard to find, they can be lucrative if done correctly. For these reasons, it’s important to know how to find the best penny stock and avoid the other stocks that could be higher risk in comparison.
Trading Penny Stocks
You can easily buy and sell penny stocks through online brokerage platforms. They are usually not held for too long but with penny stock screeners and some knowledge of technical analysis, put a good list of penny stocks together. Buying these stocks only with the money you can afford to lose is a good rule of thumb considering the high-risk profile for many penny stocks. Still looking for more? Check out our other articles on PennyStocks.com about how to buy penny stocks.