How to Invest in Penny Stocks

Penny stocks are typically defined as those stocks that are traded for under one dollar per share and many consider investing in them to be one of the riskier investment activities to take part in. Some beginner investors are drawn to these stocks as their cheaper on a per share basis without knowing that they often come with a fair degree of volatility and risk. Here is a step by step guide to investing in penny stocks.

1. Set up a Brokerage Account

To get started investing in penny stocks youâ re going to need to set up an online brokerage account, a useful guide for which can be found here. Penny stock trading strategies tend to deal with higher volumes so youâ re going to want to look for brokerage accounts with low per trade fees.

2. Understand the Risks

Before investing in penny stocks you need to understand the risks related to this particular stock type. The reason many of these stocks are traded for less than one dollar is that often the companies are either small start ups or companies that have lost share price and are at risk of bankruptcy. These small capitalization companies with their low stock values are typically not listed on established stock exchanges where they would have to adhere to strict SEC disclosure requirements. This lack of disclosure means that you have a lot less information available than you would have when investing in more conventional stocks. Another risk related to penny stocks is that they are not typically very liquid, meaning that few shares are traded on a daily basis. This could be a major concern to you if you wanted to dispose of a significant holding and simply couldnâ t find buyers available. Lastly, due to the factors and limitations above penny stocks have historically been used as a method by which fraudsters can take advantage of investors. The lack of disclosure requirements make it easier for individuals to set up false or misleading companies to literally take the money and run.

3. Do Your Research

This is important for all stocks but even more so when it comes to penny stocks as there is even less publicly available information than there is for most other types. Youâ re going to want to look at any available public data as well as the historical performance of the stock. When looking at the historical information youâ re going to want to see what kinds of events and share price reactions have occurred. The kinds of things youâ re looking for are events when the share price stayed flat when you would have expected an increase. This may indicate that other investors have looked at the stock information and walked may be a good idea for you to follow suit.

4. Ignore the Hype

When you enter the world of penny stocks youâ re going to see all sorts of hype and promotion of the â
By Jeffrey Glen

Copyrighted 2020. Content published with author's permission.

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