Stocks Trading

Trading Penny Stocks Basic Guide

What are Penny Stocks?

In general, Penny Stocks are stocks that trade below $5.0 per share. Penny Stocks are characterized by high price fluctuations in very short time periods. Trading Penny Stocks is very risky and it considered as the ‘Wild West’ of stocks investing. When a Penny Stock trades below $0.30 it is called as a Sub-Penny Stock.

Penny Stocks Characteristics

Here are the main characteristics of trading Penny Stocks:

(1) Priced below $5.0

(2) Trading in OTC Markets and not regulated by Securities and Exchange Commission (SEC)

(3) High Price Fluctuations in Short-Periods

(4) Low Daily Volumes

(5) High Distance between Buyers and Sellers

(6) High Risk / High Returns

(7) Not Suitable for Large Investors

(8) Low Reporting Requirements (increased risk of misbehavior)

(9) Can be used as ‘vehicles’ for not listed companies (in this case the price usually booms)

(10) The price of a penny stock can be easily manipulated by individual investors or a lobby.

Penny Stocks Orders

There are two major order types when placing a trade:

(1) Market Orders

You can use a market order to buy/sell a Penny Stock Share at the closer Ask / Bid price. The advantage of this order type is fast execution and the disadvantage is that you may fill your order in a much higher (when you buy) or in a much lower (when you sell) price that the current Market Price. Market orders can cause you great problems and they are suitable only when you are trading important news.

(2) Limit Orders

This order type can limit the price level that you will buy or sell a stock. The advantage of this order type is that you can be sure about the price that you trade will be executed. The disadvantage is the speed of execution. If you place your limit order in a high distance than the current market price, your order may need days or even weeks to be filled.

Wise investors are trading 95% using Limit Orders and 5% using Market Orders.

Penny Stocks Daily Volumes

Penny stocks are traditionally less liquid than other stocks. Liquidity is considered important as it can determine how easily an investor can buy (entry) or sell (exit) a particular stock. Furthermore, insufficient liquidity concludes in high spreads. Spread is the distance between Buyers and Sellers.

Here are some Penny Stocks sorted based on their daily volume.

Low Reporting Requirements

Penny stocks are traded on OTC (over-the-counter) systems which are also called as ‘Pink Sheets’. Stocks which are listed on national exchanges must register and meet the standards of SEC. On the other hand, stocks that trade on OTC markets do not meet high standards as concerns reporting requirements.

Company’s Level of Disclosure

As Penny stocks are not regulated by the Securities and Exchange Commission (SEC) it is highly recommended for all investors to search for important information regarding the reliability of the management. Investors must be sure about the company’s level of disclosure. The OTC bulletin board can provide such information.

The OTC Bulletin Board

The OTC Bulletin Board is a US quotation medium for subscribing members used for many OTC equity securities that are not listed on a national stock exchange. Dealers who subscribe to the OTCBB can use the system to enter orders for OTC securities that qualify to be quoted.

► The OTCBB official web-site

The OTCBB site contains also a Delinquency/Eligibility list presenting companies that have and haven’t met its standards.

Penny Stock Brokers

There are many stockbrokers offering penny stocks assets. Here are some choices:

• TDAmeritrade
• Scottrade
• Etrade
• Schwab
• OptionsHouse
• TradeKing
• LowTrades

Penny Stocks Systems

Here are some popular systems to Trade Penny Stocks.

■ Trading Penny Stocks

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