Penny Stocks

I don’t know what you know about penny stock trading, so permit me to start with some basics.

I’m going to assume you know what the stock market is, what stocks are and how to trade them. If you don't know these things, don't worry. We have many penny stock advice article on our site.

What Is A Penny Stock?

A penny stock is a stock for a smaller company with limited assets. Generally, you’ll see a penny stock trading anywhere from sub-pennies to $5 per share. Many penny stocks are also “microcap stocks.” Sometimes you see these terms used interchangeably. Personally, I don’t mind. Microcaps are companies with under $250 million in market capitalization and many of them are really in the penny stocks arena.

According to the SEC . . .

The term “penny stock” generally refers to lowpriced (below $5), speculative securities of very small companies.

Above I’ve pointed out what the U.S. Securities & Exchange Commission has as their definition of a penny stock. As you can see, it’s a bit ambiguous, which is why there’s always confusion as to what is and isn’t a penny stock.

I tend to follow the SEC definition. The question that arises is what does “very small companies” actually mean? Is $250 million small? How about $500 million? Small compared to what? The Market? For now, just think of penny stocks as stocks that are below $10 (got to adjust for inflation) and for companies that could qualify as a microcap.

All stocks are speculative, so that part of the definition means little. Where are penny stocks traded? You can trade penny stocks on NASDAQ, OTCBB, Pink Sheets, etc. And you can buy penny stocks online. I find my penny stocks on NASDAQ and OTCBB. I’m sure there are interesting trades happening with pink sheets, but I don’t care.

What you do is your own business, but I recommend sticking with penny stocks listed on the NASDAQ and OTCBB. I also recommend sticking with stocks that are over about 50 cents per share and under $10. Personally, I like staying above $1 (or close), but I’ve made money with stocks that were trading for dimes, so it’s not a “can’t break” rule.

Penny Stocks Trading Verses Penny Stocks Investing

These terms are often mistakenly used interchangeably. When you invest, you’re basically going long. You’re saying that the stock you buy could evolve into something even better and you want to stick it out. An example might be investing in Apple because you think the company will keep growing for years and you want to be in on it. Successful stock investors spend lots of time researching and hoping to find the next McDonalds or Starbucks.

It's up to you what to do, but in the penny stock market, I'm a penny stocks trader. I have invested in the past, but that's because I was pretty certain that the company was about to be bought up by a large corporation or something major was about to happen. Generally, I won't go long in penny stocks. It's far too difficult to guess what the next big thing will be in this sector of stocks. I'd rather ride the ups and downs of the stock market and profit the whole way.

With penny stock trading you really don’t care about whether a company booms to greatness down the road. You want to profit on what the stock is doing right now. There are various types of penny stock trading (you’ve heard the term “day trading” I’m sure). Depending on the type of trading you’re doing, you might hold the stock for a minute, an hour, a day or a couple days. You have no vested interest in the company. Your interest is in the stock moving the way you want it to move in the short time you have it. And that my friends is the only way to play this game. While the “long investor” is waiting for XYZ & Company to evolve into Wal-Mart, I’ll be in and out of stocks making a profit. When someone tells me that a stock or the market in general is very volatile, they usually have a “sad face” on. Why aren’t you smiling? Let’s put a smile on that face . . . money is about to be made.

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