How to Find Penny Stocks
Understand what penny stocks are., Know the risks of investment in penny stocks., Consider the potential benefits of penny stock investment., Locate information on penny stocks., Get to know a dealer familiar with penny stocks.
Step-by-Step Guide
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Step 1: Understand what penny stocks are.
In general, penny stocks are common stocks that sell for $5 or less per share. (The term will sometimes be applied to slightly higher-priced stocks.) Their low price makes them an attractive bet for some investors, but committing large sums of money to small, unestablished companies can be dangerous.
Many investors do not consider stocks that sell on the New York Stock Exchange (NYSE) or other large exchanges to be penny stocks, regardless of their price.
These exchanges have vetted the companies they list, and this provides an air of legitimacy that stocks sold "over the counter" (directly by a dealer) typically do not have. -
Step 2: Know the risks of investment in penny stocks.
A great many investors stay clear of penny stocks, considering them too inherently risky.
There are, in fact, certain risks to investing in companies that may lack brand recognition or a proven record of profitability.
Many companies issuing penny stocks are not well known and may not be subject to the public regulation imposed on larger firms.
Small companies that are sold over the counter and are first entering the market do not even have to file complete accounting records with the SEC (Securities and Exchange Commission).
Similarly, although all publicly traded companies are required to report their assets, liabilities, and profits, there is a feeling among some investors that certain small companies do not necessarily report these figures accurately.
The failure rate of many penny stock companies is very high.
To suggest that most of these companies go out of business quickly would be misleading.
However, when compared to firms that have higher stock prices, companies with penny stock offerings go bankrupt at a comparatively high rate.
Penny stocks are especially vulnerable to price manipulation.
In schemes commonly referred to as "pump and dump," certain investors will promote a company whose stock they hold with the aim of raising the market value of the stock and then selling their own shares, sometimes very profitably.
Larger companies with higher-priced stock do not lend themselves well to this tactic, but it does occasionally work with less well-known stocks. , Despite the risk, many investors are willing to take certain chances on penny stocks.
The potential for profit is great, and not all penny stocks present the same risks.
Some are shares issued by established companies that for whatever reason have come to be considered over-valued but still posses certain worthwhile assets.
To generalize about all penny stocks is to ignore significant differences between them and thus lose out on the chance to make substantial profits. , The best penny-stock information is provided by dealer organizations.
The two most recognized publications of penny stock information are the Pink Sheets and the Over the Counter Bulletin Board.
Many companies that are not on the major exchanges list their stock information through the Pink Sheets--a daily, online publication produced by the National Quotation Bureau.
The bid and ask prices of the stocks are listed by the Pink Sheets, but keep in mind that companies on the Pink Sheets are not required to provide any information to the SEC.
The Over the Counter Bulletin Board is an inter-dealer quotation system and electronic trading service offered and regulated by the National Association of Securities Dealers.
It lists real-time quotes, most recent sale prices, trading volume, and other information related to thousands of different stocks.
All companies listed on the OTCBB must provide their information to either the SEC or an insurance or banking regulator. , The market for penny stocks is inherently opaque.
These companies simply do not get the attention or publicity that major corporations do, and the marketplace can be difficult for an outsider to understand.
Work with an advisor who operates in a "fiduciary" capacity (someone legally required to work in your best interests) so you can learn the market before investing. -
Step 3: Consider the potential benefits of penny stock investment.
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Step 4: Locate information on penny stocks.
-
Step 5: Get to know a dealer familiar with penny stocks.
Detailed Guide
In general, penny stocks are common stocks that sell for $5 or less per share. (The term will sometimes be applied to slightly higher-priced stocks.) Their low price makes them an attractive bet for some investors, but committing large sums of money to small, unestablished companies can be dangerous.
Many investors do not consider stocks that sell on the New York Stock Exchange (NYSE) or other large exchanges to be penny stocks, regardless of their price.
These exchanges have vetted the companies they list, and this provides an air of legitimacy that stocks sold "over the counter" (directly by a dealer) typically do not have.
A great many investors stay clear of penny stocks, considering them too inherently risky.
There are, in fact, certain risks to investing in companies that may lack brand recognition or a proven record of profitability.
Many companies issuing penny stocks are not well known and may not be subject to the public regulation imposed on larger firms.
Small companies that are sold over the counter and are first entering the market do not even have to file complete accounting records with the SEC (Securities and Exchange Commission).
Similarly, although all publicly traded companies are required to report their assets, liabilities, and profits, there is a feeling among some investors that certain small companies do not necessarily report these figures accurately.
The failure rate of many penny stock companies is very high.
To suggest that most of these companies go out of business quickly would be misleading.
However, when compared to firms that have higher stock prices, companies with penny stock offerings go bankrupt at a comparatively high rate.
Penny stocks are especially vulnerable to price manipulation.
In schemes commonly referred to as "pump and dump," certain investors will promote a company whose stock they hold with the aim of raising the market value of the stock and then selling their own shares, sometimes very profitably.
Larger companies with higher-priced stock do not lend themselves well to this tactic, but it does occasionally work with less well-known stocks. , Despite the risk, many investors are willing to take certain chances on penny stocks.
The potential for profit is great, and not all penny stocks present the same risks.
Some are shares issued by established companies that for whatever reason have come to be considered over-valued but still posses certain worthwhile assets.
To generalize about all penny stocks is to ignore significant differences between them and thus lose out on the chance to make substantial profits. , The best penny-stock information is provided by dealer organizations.
The two most recognized publications of penny stock information are the Pink Sheets and the Over the Counter Bulletin Board.
Many companies that are not on the major exchanges list their stock information through the Pink Sheets--a daily, online publication produced by the National Quotation Bureau.
The bid and ask prices of the stocks are listed by the Pink Sheets, but keep in mind that companies on the Pink Sheets are not required to provide any information to the SEC.
The Over the Counter Bulletin Board is an inter-dealer quotation system and electronic trading service offered and regulated by the National Association of Securities Dealers.
It lists real-time quotes, most recent sale prices, trading volume, and other information related to thousands of different stocks.
All companies listed on the OTCBB must provide their information to either the SEC or an insurance or banking regulator. , The market for penny stocks is inherently opaque.
These companies simply do not get the attention or publicity that major corporations do, and the marketplace can be difficult for an outsider to understand.
Work with an advisor who operates in a "fiduciary" capacity (someone legally required to work in your best interests) so you can learn the market before investing.
About the Author
Judy Wilson
A passionate writer with expertise in lifestyle topics. Loves sharing practical knowledge.
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