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What is a penny stock?
A penny stock is any stock priced under five dollars. Some traders and investors would say any stock under one dollar is a penny stock but for the purposes of this article we'll go with the general consensus.
Penny stocks are usually avoided by the "big boys" i.e. hedge funds, mutual funds, and other stock investment vehicles because they are riskier than your higher-priced stocks with more well-known names. That is generally a good rule of thumb with investing but you may be a smaller sized trader with a new account just looking to grow your account size. If that's the case then it wouldn't be the worst idea to try and amplify your trading results faster than you ever be able to in blue-chip stocks.
Why are penny stocks riskier?
Penny stocks are not always subject to the same rules and regulations of the bigger named and higher-priced stocks so there isn't as much fundamental information to go on to evaluate the companies.
Penny stocks are not required to report financial information to the SEC.
Most penny stocks have a very short trading history, usually less than 5 years.
Where do you find penny stocks?
Any stock screener can screen for stocks under five dollars per share. FINVIZ, MarketWatch, and Yahoo Finance Screener just to name a few.
There are several forums online(including this one) where you can discover and research penny stocks.
Pump and Dump
If you've traded stocks for a while you've probably heard the term "pump and dump".
The term pump and dump refers to when an individual or group of individuals drive up the price of a stock and then sell it before the latecomers get a chance to. This, of course, drops the price significantly and the latecomers are left holding the bag, This type of manipulation is nearly impossible with higher-priced stocks that trade more volume. Because penny stocks are so cheap even a guy $50K can explode a penny stock in no time.
You have t be very mindful of pump and dumps when trading penny stocks. If you are ever in a penny stock and get a HUGE run up you take your money and RUN. Penny stocks do not go from $1 to $7 then $7 to $35. It doesn't work that way. What will usually happen is the stock will go from $1 to $7 then back to $1 and never see $7 again. DO NOT GET LEFT HOLDING THE BAG.
The BIG event
One of the most appealing aspects of penny stock trading is that you could be in a stock when a big positive news story hits the company. This can skyrocket a stock to the moon and if you're in it you'd make a pretty penny. You buy ten thousand shares of a one-dollar stock and it triples on a news story and you now have a profit of $20K.
That is the biggest draw of penny stocks but be mindful that the sword cuts both ways!! You can also lose big on penny stocks.
Summary
Penny stocks can be a GREAT to trade stocks but they have to be traded carefully and with respect to what could go wrong. Do as much due diligence as you possibly can before buying any stock. Have a plan of action in place for the stock if it goes in your favor as well as if it goes against you.
This article is sponsored by two of the BEST penny stock services online - MicroCap Millionaires and Tim Sykes Penny Stock Newsletter.
Click Here To Sign Up For MicroCap Millionaires
Click Here To Sign Up For Tim Sykes Penny Stock Newsletter
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