Working a corporate job is rewarding, but it can get monotonous at times. If you’d like some excitement in your life, and would like to make money on the side, trading penny stocks can be a fun hobby if you’re working a regular 9-5 job. The usual caveats apply — trading penny stocks is risky, and don’t invest money that you can’t afford to lose. But here’s an ultimate guide to penny stock trading where we will describe:
- What is a penny stock?
- How a penny stock is created?
- How to invest in penny stock trading?
- Rewards of penny stocking &
- Risks involved in penny stock trading
If you want to trade penny stocks, or if you want to invest in penny stocking, this guide is for you to educate yourself. Don’t make the mistake of investing in the stock without researching and knowing about it or else recovering after the loss will be inevitable. Most people think that penny stocking only means fewer investments and instant profits without putting up any efforts. Penny stock comes with immense profit but with higher risks as well.
Without any further delay, give us a chance to describe and guide you about penny stock trading:
What is a Penny Stock:
Penny stock basically refers to a stock of a small company or business that is traded for less than 5$ per share which is also known as one-cent stocks. It means that the stocks shared or traded between the companies and investors revolve under $5 only.
Penny stocks are not traded regularly on large exchanges like Newyork Stock Exchange. Instead, they are traded via over-the-counter transactions through electronic systems. The Electronic OTC Bulletin Board helps with the transactions along with the privately-owned pink sheets.
So the summarized definition of penny stocks is, “the stock that a company trades through ‘the pink sheet’ and ‘electronic OTC bulletin board’ under 5$ is considered to be a penny stock.”
Previously, penny stocks only meant any trade that takes place in less than 1$ per share. However, later the US Securities and Exchange Commission that is responsible for protecting investors and their functioning of the security market modified its meaning. They define it as trades that are shared below 5$ by companies or businesses are penny stocks trading.
How a Penny Stock is Created:
Startups and small companies issue stock to raise capital in order to grow their business or company. This process is considered to be a time-consuming one, but it is highly recommended because of its effectiveness.
The stock is created through the process of IPO, an initial public offering, where a company first files a registration statement with the Securities and Exchange Commission (SEC). This filing mentions the location where the stock is planned to be sold by the company. It also requires the financial statement of the company and its proposed sales materials. Along with that, timely reports are filed within the Security and Exchange Commission. To underwrite penny stock, an attorney or investment bank is hired by the company.
After it’s approved, the company has several options to take orders. Those options are:
- Soliciting orders from investors
- Listing stock on a larger exchange
- Trading it through over-the-counter transactions
The stock is then sold to investors after the initial orders are collected. The strict requirements for listing a stock on a larger exchange increases the need to trade stocks through electronic transactions. The over-the-counter transactions are easy to deal with because the stocks there, are not traded regularly.
Ways to Invest in Penny Stocks:
The most common method used to invest in penny stocks is to buy the stocks, keep them till the prices rise and then sell those shares. This is considered to be the most significant method because the extremely low prices attract investors as they keep thousands of shares with them for as long as they want.
Another way to invest in them is to use the ‘short-sell’ penny stock method. Here the investor keeps the shares that were borrowed by them and they did not have to buy them. Then the investor sells them even when the rates decline as it still benefits him and his company.
Risks of Penny Stock Trading:
No matter what type of business you want to establish, risks are always involved in the process. To deal with risks and loss, a person should be well-prepared. Along with that, you should also educate yourself regarding all the information, advantages and disadvantages.
Investors with a high tolerance for risk can exceed in growing their business through penny stock trading. As penny stocks are volatile, they provide a higher risk of reward as well as a higher risk of loss. A huge risk factor comes when a person invests through the process of ‘buy on margin’, which means the funds were borrowed from a bank or broker to purchase the shares in the first place. Because if the company does not get any buyers then their money and investment will all be lost. The chances of losing all the investment increases.
Moreover, the other risk factor revolves around small companies. The stocks are created and sold by small companies that do not have proper knowledge and information regarding it. In this way, they fail to focus on the key points of business development.
Rewards of Penny Stock Trading:
People who do not have a lot of money to invest, start with a penny. But a penny that is invested easily can also result in an easy loss. This is undoubtedly a high-risk investment. Companies that are associated with penny stocks are considered to be unstable and make infrequent trades. Fewer buyers of the stock in the market are the reason for infrequent trades.
But with proper knowledge regarding it, the risk factors become low and exciting to work with by trading penny stocks. There are sizeable gains in trading penny stocks as a small amount needs to be invested with the hope of higher profits. With complete research and proper marketing, the investors find buyers at the right time. In this way, they can sell them the stocks that accurately reflect the market price.
So with the help of this information that is provided in this article, you will be able to determine whether penny stock trading is the right kind of business investment for you or not.