What are Penny Stocks?

Penny stocks are companies in the stock market that (usually) have a per-share cost of under a dollar. They are known for moving quickly, as well as being invested in massive amounts of shares at a time. Mostly these are known from the fact that you can invest $10,000 USD into a penny stock when the stock is 5 cents a share, and when it hits 6 cents a share you’ve made $2000 profit. They’re known for higher end risk because they can move so quickly in either direction, that the entry barrier is a lot lower as well. Remember, however, that just because the stocks are worth less per share doesn’t mean that it’s not a bid deal losing one cent per share on these. You can still lose a good deal of money.

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According to Wikipedia:

“In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative.

In the UK markets, penny shares as they are more commonly called, generally refer to a stock and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%. In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority(FSA).”

How do you trade Penny Stocks?

You can trade penny stocks on most of the traditional brokers and platforms. One of the keys with this is that if you’re trading lower volume that you don’t want fee’s that are too high per-trade because it will end up costing you almost enough to make the trade not worth it. When you’re going to trade penny stocks make sure you keep in mind that large numbers of shares are the primary ways to actually making money with the trades. If you’re not doing too big of volume with the  penny stocks, then you most likely won’t make as high of a return as you could have if you were trading with larger lots given the amount a stock increases percentage wise.

The goal is to look at penny stocks that may have a sharp uprise in price, or in the case of a stock around 5 cents a share – any increase in price at all. Always scan IPO’s and newer stocks from the news sites and figure out if it’s a good or bad story. This is primarily good to do before the market even opens. Make sure to follow along with the stock itself and always use stoploss’s to prevent massive losses, and once it goes more upwards trailing losses work well to maximize profit. The goal isn’t to make as much money as possible, but merely make a decent amount of money while keeping your risk as low as possible.

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What’s The Profit Potential With Penny Stocks?

There is massive potential for profit with penny stocks, assuming the penny stock actually increases in value. Here’s an example scenario for you:

You purchase $5000 worth of shares of stock XYZ, at the price of 7 cents a share. This ends up being 71428 shares, comes out to $4999.96.

You sell off the shares when they reach the price of 11 cents a share. Now your stock is worth $7857.08.

By this 4 cent increase in stock price, you’ve made a profit of $2857.12. Now imagine if it went a lot higher!

The bottom line with this is that severely small increments in price end up with massive gains, as long as you find the stock at the right time and have a decent amount to invest. That’s the primary reason most people do penny stocks, quick and fast gains. The entire incentive behind penny stocks it that you can make a decent ROI using $500 where as with traditional stocks $500 may not even purchase you more than 10 shares of a specific stock.