Penny Stocks Trading: What You Need to Know

What you need to know

Penny Stocks, also known as Over-The-Counter (OTC) stocks, are a great way to earn amazing returns by investing in small companies and firms. Here are some important facts and considerations every investor and trader interested in penny stocks should keep in mind.

Penny Stocks Trading

What exactly does it take to begin trading penny stocks? Well, before we proceed, it is important to first understand what penny stocks really mean. According to the SEC (Securities and Exchange Commission), stocks valued lower than $5 per share and traded on specific exchanges (OTCBB, OTCQX, OTCQB) that are removed from the main exchanges (NASDAQ, AMEX, NYSE) can be considered penny stocks.

You’ll find them on peripheral exchanges and marketplaces. They can help you get incredibly high returns but require a lot of due diligence to yield successful results.

As with most asset classes, these have their own set of risks and advantages so it is important to consider both when making a decision. One big advantage when it comes to penny stocks is that they are very cheap, which means you will be able to diversify your portfolio with smaller investment capital amounts.

Penny Stock Regulations

Let’s dive into the regulations in this space. As we mentioned in the previous section, popular exchanges such as NASDAQ do not allow penny stocks to be traded. This can ring a warning bell for many investors since rules and compliance are more lax once you move on to peripheral exchanges. You’ll find penny stocks on the “pink sheets” which list thousands of penny stocks. You’ll find startups hoping to become giants in their fields one day.

While this might seem off-putting to institutional investors, individual investors might be very interested in penny stocks. The chance to invest in undervalued stocks is exciting.

Factors to Consider When Investing In Penny Stocks

Consider the following factors when investing in penny stocks. Liquidity is an important parameter. If the liquidity is low, it will be difficult to sell your stocks. Quick selling and buying rely on high levels of liquidity.

Also, understand the risks OTC stocks present. It’s easier for OTC’s to be scams or ‘shells’ due to fewer reporting requirements.  So consider how transparent the companies are, specifically what depth of the information is available about the company issuing them. If you are able to find credible information about the company management and their history, they are more likely to be legitimate.

Once you’ve understood the market and the risks it carries, you can begin to make informed decisions.