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.
Online Investing Glossary
60 percent margin requirement
The requirement that you must put up 60 cents of every $1 you invest.
Online Investing Glossary
annual report to shareholders
A document that contains all the required financial statements and information contained in the 10-Ks presented in a colorful format.
Online Investing Glossary
average daily share volume
The number of shares that usually trade hands in a given day.
Online Investing Glossary
balance sheet
A document that tells you what a company owns and what it owes.
Online Investing Glossary
bond
An IOU issued by a government, a company, or another borrower.
Online Investing Glossary
brokerage
A fee paid to a broker to handle investment transactions for you.
Online Investing Glossary
capital gains
Income you’ve made on the capital you’ve invested.
Online Investing Glossary
cash account
A brokerage account into which you deposit cold hard cash your broker uses to buy stocks for you.
Online Investing Glossary
commission
The price brokers charge for executing trades.
Online Investing Glossary
Consumer Price Index
The measure of how much prices for the things individuals buy are changing.
Online Investing Glossary
days to cover
The number of days it would take, on average, for the number of shares that are being shorted to trade.
Online Investing Glossary
diversifying
To spread your risk over a wide swath of investments.
Online Investing Glossary
dividend yield
The amount of return you’re getting in the form of a dividend, in other words, how big the dividend is relative to what you’ve invested.
Online Investing Glossary
dividends
Cash payments made by companies to their investors.
Online Investing Glossary
earnings reports
A document that tells you how much the company made during the quarter. Earnings reports also contain all the vital financial results for the quarter, including the net income (or total profit) as well as earnings per share, which is how much of the company’s profit you can lay claim to as a shareholder.
Online Investing Glossary
Exchange Traded Funds; ETFs
Groups of stocks, much like mutual funds, that trade like stocks.
Online Investing Glossary
geometric mean
The way to correctly measure stock return.
Online Investing Glossary
holding period
The length of time you hold a stock.
Online Investing Glossary
income statement
A document that outlines how much money a company made.
Online Investing Glossary
limit orders
Trades in which you set the price you’re willing to accept.
Online Investing Glossary
maintenance margin
The percentage of ownership of stocks relative to what has been borrowed (typically 30 percent or higher at most firms) most online brokers require investors to maintain.
Online Investing Glossary
margin account
An account type that lets you borrow money you can use to buy stocks.
Online Investing Glossary
mutual funds
Money collected from many investors and used to invest in a basket of assets.
Online Investing Glossary
number of shares outstanding
The number of shares that are in the hands of investors.
Online Investing Glossary
options
If you own an option, you have the right, but not the obligation, to buy or sell an investment, including shares of stock by a certain preset time in the future.
Online Investing Glossary
penny stocks
Stocks that trade for less than a dollar.
Online Investing Glossary
Producer Price Index
Tracks prices paid by companies that create goods. When prices are rising, both bond and stock investors pay attention because that affects the value of their investments. Stock investors typically don’t like inflation because it drives up costs and makes their investments worth less.
Online Investing Glossary
proxy statement
A document that describes company matters to be discussed and voted on by shareholders at the annual meeting.
Online Investing Glossary
shareholders’ equity
The difference between assets and liabilities is what portion of the company shareholders own, called.
Online Investing Glossary
short squeeze
What happens when the short sellers get nervous that a stock they’re betting against will rise and they rush out and buy the stock back so that they can return it to the brokers they borrowed it from.
Online Investing Glossary
taxable accounts
The standard accounts that come to mind when you think about investing online.
Online Investing Glossary
tax-advantaged accounts
Accounts that are sheltered in some way for some period or other from the Internal Revenue Service.
Online Investing Glossary
total return
The amount a stock has gone up plus its dividend.
Online Investing Glossary
turnover
The amount of buying and selling a fund does.
Online Investing Glossary
valuation ratios
An estimation a stock’s value computed by comparing the stock price with a measure taken from the company’s financial statements.
Online Investing Glossary
volume
A measure of how many times shares of a stock or ETF trade hands.
