Penny stocks: A beginner’s guide to stock investing 2022

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Penny stocks are often the first obvious stop for new investors. Penny stocks, as the name indicates, are corporations with a low share price, frequently less than $1. It’s easy to see how novices get enamored with the prospect of investing a few cents in a firm and then selling for a large profit when the price rises to multi-dollar levels. Because of the exceptionally cheap pricing, an investor may own thousands of shares for a relatively modest amount of money. With that kind of scale, a gain of a few cents per share might result in huge percentage gains. On the other hand, the reverse is also true, of course.

A securities issued by a small-cap or micro-cap firm with a market valuation of less than $250 million is considered a micro-cap. Others define penny stocks as those that trade for less than $5 per share (but other experts prefer a $1 per share cut-off number). They often have a non-existent financial history or have a poor financial past: the underlying firm may be on the verge of bankruptcy. In a nutshell, think of them as the polar opposite of blue-chip stocks.

Penny stocks are often traded on large stock exchanges. Because the major stock exchanges, such as the NYSE and Nasdaq, have listing criteria for firms trading on their platforms, this is the case. If a firm fails to maintain a minimum closing bid price of $1 per share for 180 days, Nasdaq will delist its shares. As a result, investors looking to trade penny stocks frequently turn to the over-the-counter market (OTC). The OTC Markets Group divides securities into tiers based on their operational integrity, quality of transparency, and level of investor participation.

The next step is to decide which stock to trade now that you know where to trade penny stocks. Stock screening tools, such as those accessible on the OTC Markets website or Finviz, are one common way. The simplest technique to narrow down the trading universe is to look for equities with a price under $1. Depending on your approach and risk tolerance, you may narrow the selection even further. Perhaps you’re just interested in penny stocks that operate in the medication manufacturing industry, for example. You’d make the appropriate modifications and then run the filter in this situation.

When it comes to creating a trading account, there are several variables to consider, including the simplicity of moving cash, costs, and customer support. Brokers specialize in various fields, so take your time looking for one that will match your requirements. One aspect of penny stock investing that penny stock investors should pay special attention to is the fee structure. Some brokers charge charges based on the number of shares you own. This structure is often established at one rate for the first number of shares and then at a different rate for each successive share.

When it comes to penny stock trading, it’s critical to be aware of the hazards involved. Because most institutional investors, such as mutual funds, index funds, and money managers, are prohibited from trading penny stocks by their charters, these securities have a small following among investors. As a result, liquidity is a major concern: It’s not uncommon for individual investors to become locked in a position for days or weeks before adequate supply or demand exists to enter or exit, resulting in significant price changes. It is easy for traders to influence penny stock prices to make them appear weak or powerful.