A penny stock is a stock valued at less than $5 and that trades over the counter (OTC) rather than through a stock exchange. Many of these stocks are literally valued for pennies. Because these companies are not listed on a stock exchange they do not report to the Securities and Exchange Commission; therefore finding information on these companies requires more effort. Penny stocks require a much smaller investment to own a significant number of shares and can make you a lot of money if you buy into the right company. You can also easily lose money with penny stocks, which are considered a high risk investment.
Learn all you can about penny stocks. Lists of penny stocks can be obtained from brokers who specialize in the industry. There are also penny stock lists on the Internet and subscription services (see Resources). It is important to invest in education before investing in penny stocks. Forums, websites, news sites and e-books are a great way to learn about penny stock investing. You can also find books on penny stock investing at the library.
Plan and conduct your own research. Be careful with strategies and methods you learn from your studies. When you find a strategy or method you like, conduct your own research before putting it into practice with real money. Make sure your investment decisions are based on fact, not theory or opinion.
Paper trade with play money using a stock simulator website or a spreadsheet to track your simulated trades (see Resources). When you are able to consistently make a profit with your paper trades then move into the real thing. Keep your investment strategy exactly the same as when paper trading, but use real money through a stock broker.
Develop a solid plan for investing in penny stocks and consistently stick to the plan. You can tweak and adjust your investment strategy over time, but there should be rules that you consistently follow. For example, figure out the maximum percentage of your investment capital that you will invest in any one stock and never exceed that amount. Also, purchase a variety of stocks (diversify) so that all of your investments are not concentrated in one sector of the economy or in one industry. This will lessen your risk of a sudden major loss to your entire portfolio. Never invest in a company that you know little about, no matter how highly recommended, always do your homework first. This will protect you and keep from falling prey to investment scams. Most importantly, look for penny stocks that have a consistently high trading volume. Trading volume translates into liquidity. If there is no liquidity, you will be unable to sell the stock unless you lower the price to the point where buyers are willing to enter a trade, which means you will most likely lose money.
Drew Nelson is a Certified Public Accountant with over 20 years experience. As a professional he has written dozens of reports, presentations and manuals. His articles appear on various websites, covering finance, economics, politics and health topics.