How penny stocks work- A beginner’s guide

Financial advice from a proper guide is very important before any investments that you make. This article will serve as a good introduction for beginners getting into penny stock trading.

What are Penny stocks?

Small companies with less funds or resources can be typically called by the name. Previously if a share trades of a company goes less than a dollar then it has to be called a penny stock but now $5 is considered as the limit although its more than a penny.

Penny stocks can be bought from the local stockbrokers. The stocks that are listed in the exchanges like NYSE and NASDAQ are relatively cheaper than others and the risks involved are very low although many does not consider them to be ‘typical’ penny stocks.

The real/volatile penny stocks trade mainly on OTCBB (Over the Counter Bulletin Board) and Pink sheets (the matter is printed on pink paper and thus the name) which comes with a risk of getting tampered. OTCBB is actually a quotation with some listing requirements (just like an exchange but less strict) whereas Pink Sheets is just a ‘quotation publisher’ providing the investors with information of the quotations. That makes OTCBB a little more trustworthy than pink sheets.

The RISKS involved

There are 3 primary factors that are the main cause of the risky nature of the penny stock market. (yes this is the guide for beginners, so we’d like to talk about risks as well)

  1. Lack Of Accurate Public Knowledge – Penny stock companies aren’t required to register with the Security and Exchange Commission (SEC), and thus, any information available concerning penny stock companies might not be derived from credible sources.
  2. Lack Of History/Credibility – Many penny stocks listed have a bad track record of performance and/or industry credibility. They may also be brand new companies with no history at all. That makes it difficult to form a reliable hypothesis about penny stock profit/loss outcomes.
  3. Poor Liquidity – Penny stocks are notorious for having poor liquidity. The high likelihood of not having any interested buyers when reselling a penny stock is one of the main reasons for the poor performance of the penny stock market.

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Due to these factors, many investors usually are not much interested in penny stocks and thus they become high risk investments with low trading volumes going very low. It is a sort of gambling, but as a true gambler says, lady luck might be smiling at you- who knows?

Lets find out.

What are some ‘GOOD PENNY STOCKS’?

(You can subscribe to our website for free alerts on most active penny stocks here.)

It sometimes happens that a big company’s shares tumbles down to penny stock. Many companies have been able to turn over the situation in just a few years like HudBay Minerals, Inc. (HBM), which transformed itself from a micro-cap to the $2.5 billion entity that it it has become, giving super crazy returns to share holders.

You need to look for companies that can become profitable over times and whether they are capable of competing with others in the market. Certain sectors have more stocks that cost a penny.  For e.g. Metal and mining companies in America often trade in the pennies. It is very important to invest in those companies having a strong grasp over the market shares.

Some of the best companies who have excelled in penny stock are:
Genetic technologies Ltd, an Australian based company has their shares up by a whopping 93 % this year. They are a diagnostic center and have plans for expansion.
Miller Energy Resources Inc. shares are up by 65% year in this year who is an independent exploration and production company of oil and gases in South central Alaska.
There are many such companies who have a very good amount of rise in shares this year despite investing in penny stocks. (View our top-10 for 2015)

Good Penny Stocks
Growing penny stocks graph

Image source

Should you buy them?

Low rates of shares and the profit that can be gained, makes penny stocks pretty alluring to people but this is almost a game where you need to know the right tricks to succeed as you might gain a 50% to even 100%.

The risks involved can be lessened if you scrutinize the stocks into which you are about to invest. Adopt a buy-hold policy which lessens the risk. Although holding penny stocks for quite a long time might not work out well. It is safe to invest in stocks that trade at least of 100,000 shares a day. (Click to read in detail)

Many American’s have changed their lives for better over times by investing in penny stocks WISELY. One such person is Timothy Sykes who became a millionaire by the age of 21 says, “I turned $ 12,415 into a cool $1.65 million over a couple years.” He has taken tiresome efforts for over 14 years to reach his goal. He has been featured in a famous TV shows namely Wall Street Warriors. So, you can go out and take a good chance to test yourself with the penny stocks as they are may turn over the saying, “All that glitters is not gold”

Get some training!

There are some great subscription services out there you can become a member of, that can teach you a lot of information to become a more profitable trader/investor. You might also consider a single penny stock professional to “teach you the ropes”. Remember, the key to penny stock trading profits is the fact that you’re YOU, and have the time and money to invest in penny stocks in the first place.

That’s it!

Well, take a look at this video to sum up the knowledge you just acquired reading. You can thank us later!