How To Invest In The Penny Stock Market

Once you learn the basics of how to invest in stocks, you may wish to consider investing in penny stocks. A penny stock may be defined as any stock with a share price of under $5. Stocks trading on the pink sheets are also referred to as penny stock. Although the share price of penny stock may seem fairly attractive, you may wish to arm yourself with appropriate knowledge before venturing into trading penny stocks. Here are a few tips:

Understand the Risks

Normally penny stocks are very risky to trade in. Since their prices are so low so even a minor fluctuation of a few cents can double or halve your investment. You should also be aware that given the low value per share, penny stock can be easily manipulated by shareholders and traders to benefit certain traders. It is extremely important to know your risk tolerance before you start trading in penny stocks.

Collection of Information

Since companies that are trading on pink sheets don’t necessarily have to register with the Securities and Exchange Commission (SEC), there is limited information about these companies available to the public. Therefore, you may need to try harder than usual to procure information on these companies. You should also be aware that pink sheet traded stocks have no mandatory accounting standards as well, so even if you are able to retrieve financial information, the information may not be very reliable. Another option is to go through full service brokerage firms since they are likely to be able to access a number of sources to collect the information. Lastly, you are going to have limited or unreliable statistics on trading history of such stocks, so trading in these becomes that much more difficult because it’s harder to look at past trends and conduct projections for the future.

Liquidity Considerations

Since penny stocks are very vulnerable to price fluctuations, and may be traded in limited volumes, it becomes very hard to figure out the liquidity of these shares. Given the limited trading volume, your own buy or sell order may be of a significant enough size to cause major price fluctuations. Therefore, before investing you have to analyze the liquidity of these shares as that will show you the window of how much to buy or sell at any given time.

Analyze Recommendations

A lot of times penny stock companies will actually pay the brokers to give a positive recommendation to the potential investors. Therefore, you have to be very careful of biased opinions that could result in losses from your investment. You will need multiple opinions on the same stock to arrive at a balanced conclusion. This may not be easy since penny stocks are not well covered by analysts until a major event occurs. If you wait too long after such an event has occurred, you are likely to have lost a major part of the opportunity in any case.

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