Stock Trading With Penny Stocks

Penny stocks in the US are also called “micro cap equity”, and refers to any share of a company which trades on the stock market for less than $5.00 – according to the US Securities and Exchange Commission definition.  There seems to be some other criteria that individuals, analysts and international investors use to define penny stocks, some of which is contradictory, such as a price per share being less than $1; stock trading on the more obscure markets, like Pink Sheets; or having a market cap of $25 million or less.

Types of Companies Trading on Pink Sheets or OTC BB

Stocks trading for under $1 on Nasdaq:  the companies may see better days, but the odds are not in favor of these stocks.  Most experts recommend avoiding these stocks, but if you can’t resist, wait until the stock begins to turn around before buying.

New business start ups: when a new business decides to expand or cash out equity, many will begin stock trading on the OTC BB as a penny stock before filing for an IPO.

How to Begin Stock Trading with Penny Stocks

When stock trading companies are listed on Pink Sheets, there may not be an annual or quarterly statement to review.  They are not required to file these statements which makes it difficult to research them thoroughly.  Any information you do find from other shareholders is probably going to be a bit biased, since shareholder will want the company to succeed; and feels that it will since they bought the stock in the first place.

When stock trading companies are listed on the OTC BB, they are required to file both annual and quarterly statements.  This helps you analyze and research the company’s financial success more thoroughly to make a more educated decision.  Penny stocks often lose money, so when investing in penny stocks your goal is to find a company who has good management, and who has a record of consistently reducing expenses and turning a profit.

You can research penny stocks in various penny stock newsletters – but keep in mind that some of these newsletters get paid by the companies to profile their stock.  It doesn’t mean you have to avoid any stocks where the company is paying the newsletter (in shares or cash) to list the company in the newsletter, but it does mean you should do further research on your own before choosing to buy stock in that company.  You can also take a look at other companies the newsletter may have profiled in the past, to see if they are often profiling winning companies or if they don’t have a very good track record.  Some newsletters are doing the research on companies before they discuss them, which makes them a reliable source of information when choosing which companies to trade.

Checking Out The Company’s Structure

If you are going to be a Penny Stock Investor you will need to know what to look for in a company before purchasing their stock. Just relying on press releases is not enough, as companies can easily hide things from view. You will need to examine items like their share structure and their balance sheet. Additionally, you will want to look at the company’s history of SEC filings.

Share Structure

If you notice a stock from one of these companies at a price that you think is good, the next thing to look at is the float. The float is used to describe how many shares from the company are currently being traded on the market. If the float is low, that is usually a good sign. Next you will need to look at how many authorized shares are available for the company to add to the market without filing. If the authorized shares are a high number, you may want to steer clear from this company as this shows that there could be too much supply for the current demand.

Many New Traders Start Here

Novice stock traders very often start out their trading with penny stocks. Penny trading by many is considered a great way to get your feet wet in the stock trading world. While you most likely will take some losses, you very well could see some very positive gains. Many of these stocks do skyrocket and when they do that is the time to sell.

As with all stock trading, have a plan in place before you buy penny stocks.  What reasons do you have for selecting a particular company? What is the exit strategy, stop loss, and when do you take your profit?  Before you buy stock, write down your plan and then stick with it.