What Are Penny Stocks? Updated June 21, 2019

Are you thinking about putting your money into penny stocks?

Since you’ve been sent to this article I’m sure that you’re searching some information pertaining to penny stocks before you start investing.

It’s a good start for you, educating yourself prior to start investing is always the best approach.

Being someone who’s new to the stock market, you might be wondering how in the world someone will make money from trading penny stocks.

You’re not alone because it’s something I’ve heard over and over from some of my colleagues who are not currently investing in the stock market.

The truth is, however, money can be made from trading penny stocks given that you know what you’re doing.

The name, penny stock,  might make you think otherwise because I myself got confused with this name before I started. Some countries call them the cent stocks, but in the US they are called penny stocks.

What exactly are penny stocks?

Although they are referred to as penny stocks it is very rare to actually find a company that’s selling its share for a penny. I usually don’t put my money in them if I stumble upon some because once they reach that low it is very difficult to go back up.

Generally, penny stocks trading is not done like all the big companies, such as Apple, Walmart, and Bank of America, just to name a few. Those stocks are being handled by the Wall-street while penny stocks are not.

Investopedia gives a nice definition below:

A penny stock refers to a small company’s stock that typically trades for less than $5 per share. Although some penny stocks trade on large exchanges such as the New York Stock Exchange (NYSE), most penny stocks trade via over the counter (OTC) transactions.

Any stock that’s trading below a dollar per share is categorized as a penny stock. They fail to meet some specific criteria which cause them not to be listed on the national exchange.

For this reason, they are prone to the pump and dump scheme. I will explain in details what is this scheme in a later post. Since they are not listed on the national exchange, they are very volatile and prone to manipulations.

Where are penny stocks traded?

In the United States, those type of stocks is traded over the counter (OTC), also known as the pink sheet. Penny stocks are very risky, but at the same time very profitable. That’s exactly how investing works if you would ask me. any investment that’s not risky tends to be less profitable. The higher the risk the higher the profit.

With that been said, the decision of whether to go into risky stocks or the blue chips is yours to make, and no else’s.

Investing in penny stocks requires a different approach because of their volatility. You will never be too sure of the outcome of a penny stock no matter how much research you have done. But knowing as much as you can about a company before investing your money is always the best and increases your chance.

Effect of promoters on penny stocks

Penny stocks promoters and manipulators usually affect the ones that are trading for a fraction of cent. What they do is they buy as many shares as they can afford and then start sending false news about those stocks to inflate their prices. Once people start buying and the price increases they dump their shares and leave with huge profits. Unfortunately for those who bought in due to the false news lose their money. That’s what they called pump and dump.

For this reason, penny stocks traders AKA day traders have to ensure that they have done their homework before putting their money into those stocks. First off, it is crucial to follow them for some days or weeks; secondly, research their history to see their trends; and thirdly confirm that they are not scams.

If you are reading this article it ‘s because you want to learn about how penny stocks trading works. Let me be the first to tell you that you are doing a smart job by reaching out for help before you start. Many people just jump in and start trading without knowing anything which cost them a lot in return.

Conclusion

If I’d tell you that putting your money into penny stocks should be an easy task for you I’d be lying.

If I’d tell you investing in penny stock is the right way to go I’d be lying again.

However, I can tell you that there are many people who are making huge profits from trading penny stocks only.

Although they are risky, affected by scams and manipulators, many investors believe investing in penny stocks is worth it.

Do you think this market is the right one for you? If so please tell us why at the comment section.