Penny stocks are extremely inexpensive stocks issued by start-up companies or businesses facing bankruptcy. The stocks are traded on the Over-the-Counter Bulletin Board (OTCBB) and the Pink Sheets. Very few penny stocks are listed on the NYSE, NASDAQ and AMEX. They are speculative and high-risk stocks. Because the stocks have fewer shareholders, they trade infrequently and can be hard to sell once you own them.
- Skill level:
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Things you need
- Penny stock trading software
Stay away from penny stocks that you learn about from unsolicited emails or that are sold by offshore brokers. Con artists often use these means to sell penny stocks to neophyte day traders.
Subscribe to websites that offer real-time information on penny stocks. You must pay a fee for their tips, advice and databases.
Research any company you are considering investing in. Read articles in business newspapers and do an Internet search on the company owners.
Find out if there is a market for the product a company is selling before you day trade in its stock.
Listen to news and rumors, because they are the forces that drive the penny stock movement. Check out online message boards and chat rooms and read press releases. Pay close attention to how the stock responds to rumors and street buzz.
Search the SEC's EDGAR database to find out which stocks expert investors like Peter Lynch and Warren Buffett are trading in (see Resources below).
Purchase software for trading penny stocks. You will be able to buy and sell penny stocks online for a fee and, in addition, receive intraday and historical charts that you can customize for your own use.
Find an online broker who specializes in penny stocks to place an order for you. Since trading in penny stocks is speculative, these brokers are required to get written confirmation from the client concerning the transaction. You will also be given a document warning of the risks of day trading in penny stocks.
Listen for late-breaking news stories that could trigger quick movement in a penny stock. Day traders trading "momentum" stocks (securities that have consistently shown good returns during the past year) often take advantage of real-time financial news stories to decide which stock to buy.
Tips and warnings
- Don't call your stockbroker if you want to invest in penny stocks. Brokers at major firms are not allowed to sell penny stocks to their clients or offer recommendations.
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