How to Trade in Penny Stocks
Penny stocks, due to their tiny share prices, allow online investors to buy large numbers of shares. Owning large chunks of stock is appealing, but penny stocks can also be easily manipulated. Unlike giant stocks like Exxon or Microsoft, which are so valuable that you'd need billions of dollars to budge the stock, penny stocks can be nudged with just a few hundred bucks.
Just a small amount of hype or negativity can have a large effect on a penny stock's share price. A stock has to move only from one penny to two pennies to double a fraudster's money.
Many penny stocks also trade on the generally unregulated Pink Sheets and OTC Bulletin Board markets, considered to be the Wild Wild West of online investing. It's best to avoid investing in penny stocks, but if you can't resist the urge, follow these guidelines:
Read the warnings from regulators: The Securities and Exchange Commission (SEC) has released multiple warnings to investors about investing in penny stocks. You can search for a company's name and officers using the tools at the SEC's main site to see whether prior problems have occurred.
Check the company's level of disclosure: otcMarkets rates companies with one of eight icons that indicate how much information they provide to investors. The highest-quality rating is otcQX, followed by Pink Quote OTCBB, OTCBB Only, Pink Sheet Current Information, Limited Information, No Information, Grey Market, and then Caveat Emptor.
The OTC Bulletin Board offers similar information on its stocks. The site, for instance, has a Delinquency/Eligibility list showing companies that haven't met its standards.
Do your due diligence: You should, at the very least, see whether the company has released any financial statements. And if financial information is available, you should carefully analyze it. StockPatrol also features in-depth investigative reports of companies, including many penny stocks. StockPatrol's search feature can show you whether a stock you're interested in has been written about. Just reading the stories, meanwhile, can give you an idea on how to investigate penny stock companies.
Double-check that you can't do better: With thousands of stocks listed on the NYSE and NASDAQ, you should be able to find a listed stock you'd like to invest in.