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How To Trade With Penny Stocks
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What Are Penny Stocks And How To Trade Them In 2022
On the plus side, penny stocks offer cheap opportunities to buy winners; On the other hand, they can be difficult to verify and enforce. Bill Oxford/Getty Images
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Penny stocks are more popular than ever, attracting investors with low entry costs and the potential for significant financial gains. Stories of stocks rising more than 4,000 percent in a matter of months add to their allure, and new trading technologies make it easier than ever to access the market.
But while they can be profitable, penny stocks carry considerable risk. Potential investors need to understand what they are getting into.
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A penny stock refers to a company’s stock that costs a lot less, if not a penny. In the US, the SEC defines them as those trading at less than $5 per share. stock. Because they are usually traded “over the counter” (OTC) rather than on a centralized exchange, they are sometimes called OTC stocks.
Depending on the issuing company’s market capitalization, or the total dollar value of its shares outstanding, penny stocks may be called small-cap, micro-cap, or nano-cap stocks.
Penny stocks are usually issued by new or very small companies. These companies often lack the track record to generate investor interest, so their shares are sold at very low prices. Larger, more established companies may trade below $5 a share when they face financial problems or are on the verge of bankruptcy.
But it is usually traded over the counter through a network of brokers and dealers rather than in a centralized market. OTC Link LLC and OTC Bulletin Board are two of the largest penny stock exchanges.
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Penny stocks attract people who are comfortable with high-risk trades – usually very experienced investors who can distinguish small, high-value startups from low-value companies.
Loosely regulated hedge funds, short sellers, and speculators are other common participants in the penny stock market. Some mutual funds, such as the Fidelity Low-Priced Stock Fund (FLPSX) and ETFs, trade primarily in penny stocks.
If you buy whole shares, not fractions, you’ll have to spend thousands of dollars to get a large share of Facebook or Google, but you can spend much less to get into the stock market. The idea of buying a solid startup’s stock for $0.20 and cashing in for $1 or even more is appealing to many investors.
It’s every investor’s dream: to catch an unknown star before it’s discovered and ride on it as it starts to take off. Surprisingly, Amazon (AMZN) was one at one point. In 1997, you could buy a share of Amazon for $1.68; In 1998, you could get them for $5. Amazon currently trades for much more than that.
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Trading in penny stocks can be fast and furious. “So if they move 20%, 50% or even 100%, they usually make a profit in days or hours or even minutes,” says Peter Leeds, author of Penny Stocks for Dummies. It’s an excitement you’ll never see in a big stock like IBM or McDonald’s.”
But most companies don’t do as well as Amazon. Most obscure, troubled, or unproven companies aren’t great investments. There are plenty of penny stocks in hot industries like cannabis or IT, but that doesn’t mean the company is a winner.
Volatile prices bring huge profits to investors. But they can also cause significant losses. These 20% to 100% price movements are not always bullish. The SEC warns that penny stock investors “should be prepared for the possibility of losing their entire investment.”
Liquidity refers to how easily a security can be sold. A stock can be described as illiquid if it is not easy to sell it at a loss. Relatively few people trade penny stocks, so even when they start to fall, they are hard to put down.
How To Trade Pump And Dump Penny Stocks Safely
Companies that trade on large, centralized exchanges file their financial statements with the SEC, which are provided free of charge to investors. Until September 2020, these reports are not required for companies that issue penny stocks.
The SEC recently issued new rules to increase disclosure and improve investor protection. Brokers are prohibited from quoting a penny stock price unless the issuing company has publicly disclosed its current financial information.
So there is a movement towards transparency. However, up-to-date, unbiased information on penny stocks is difficult to obtain, and often there is no regulatory body that requires or evaluates company filings.
A common scheme is called “pump and dump”. Fraudsters buy huge stocks and share misleading information to attract other investors. In some cases, individuals create shell companies with no business and no assets.
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Investors buy stocks because they think they are a good investment, so the price goes up. Fraudsters then sell the shares, making huge profits and driving down the stock price. Investors are then left with worthless stocks.
After all, it’s always a good idea to do a lot of research to better understand the ins and outs of investing in penny stocks.
Trading penny stocks is not for the faint of heart. Successful investors are experienced and have a deep understanding of the industry.
They often have developed extensive analysis methods to distinguish between good deals and scams. And they can spend a lot of time shopping and browsing the fast market.
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If you are new to investing, trading penny stocks is probably not the right place to start. However, if you understand the risks and are confident that you can find an honest broker, and if you are sure that you can find a legitimate but undervalued company, it will work for you.
Ramsay is a freelance writer and data analyst at Crisp Analytics. He worked in the Office of the Chief Economist at Trade Canada and advised First Nations treaty finance groups in their work with Indigenous and Northern Canadian issues. He holds a master’s degree in public administration from the University of Victoria and a certificate in data science and big data studies from the Federal University of Paraná.
Jasmine was the Senior Editor of Insider magazine, where she led the Personal Finance Insider team, focusing on explainers, how-tos, and reviews to help readers better understand personal finance, investing, and the economy. Her team has implemented the following projects: • A series on women taking control of their finances. • Better, Smarter, Faster is a series that shows you the effective choices you can make with your money to follow your passion and achieve your big life goals. • The Money Master, a year-long guide to taking control of your finances for millennials. • Rethinking Retiring, an editorial collection of stories that will inspire and inform you about planning a different kind of future than your 9-5 life. • Road to Home, a comprehensive guide to buying your first home. He also worked with Insider’s video team to develop and create PFI’s YouTube channel. Before joining Insider, he was a senior editor at NextAdvisor, Time magazine’s personal finance brand launched in partnership with Red Ventures. Before that, he was an editor at Credit Karma.
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Penny Stocks Are Volatile, Here’s How To Trade Them And 3 To Watch
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