Low-priced, small-cap stocks are known as penny stocks. Contrary to their name, they rarely cost a penny. The SEC (Security and Exchange Commission) considers a penny stock to be pretty much anything under $5. And while there are sub $5 stocks trading on big exchanges like NYSE and NASDAQ, most investors don’t think of these when asked to describe a penny stock.
Most individual investors look at penny stocks like Wall Street’s Wild West, an untamed world of investing detached from all the glitz and media coverage that comes with stocks that are traded on major exchanges. While the gains and losses can be pretty impressive in the penny stock world, they’re not often heard about elsewhere.
Unfortunately, penny stocks have also garnered a reputation as a game filled with scams and corruption. Indeed, penny stocks could be your wildest ride yet as an investor.
So then, if these financial products usually aren’t traded on normal exchanges, where can you buy them?
Like any other stock you would buy, you can purchase shares of a penny stock through your normal stockbroker, regardless of whether or not it’s listed on a major exchange.
While cheap stocks listed on exchanges like NYSE and NASDAQ aren’t typically considered “penny stocks” per se, they can afford a lot of the benefits of penny stocks without quite so much risk. These exchanges have strict listing requirements, and while they might not allow for as much of an upside as “true” penny stocks can, they tend to be more reliable.
About buying this type of stocks one of the worst parts is that obscurity works against you. You want to find a stock that’s undervalued. It needs to have a positive value: good financials and an improving outlook. It also needs to fly under the radar of most investors: it must be overlooked.
Before you can buy a stock, other people must be willing to sell it to you at that bargain price. If the company’s really going to turn around, why wouldn’t they just hold onto it until it gets more attention? Maybe you can luck out and find someone willing to sell a lot of shares at a fire sale price. That’s also luck.
Worse yet, now that you’ve found that bargain basement price and you’ve actually bought that great penny stock, you’re going to have to try to sell it somehow. Maybe you can hold onto it until it’s popular again, but it’s unpopular for a reason. People aren’t looking at it.
People don’t want to buy it. How are you going to unload it?
Your best hope is to hold it until the company completely turns around and gets back on a normal stock market listing again. That can happen, but the risks are high.
So how can you make money with this financial product?
There are three obvious ways to invest in penny stocks. None of them are easy; none of them are guaranteed to make money fast, but you must be patient: first to find good opportunities and then to wait for the results.
The most popular way to profit from a penny stock is to buy it cheap, convince other people that it’s worth more than you paid for it, then sell it at the inflated price. This is hugely unethical and likely illegal. It’s also difficult to make work.
You’ve probably received spam email telling you about this great hot tip promising “the top penny stocks for 2017“. The price is about to explode! You’d better buy it now to lock in your profit! Think about that for a second.
Any stock that increases in value does so for at least one reason. Perhaps the underlying business has improved. Perhaps the company’s about to be acquired. Perhaps there’s going to be a huge order that only that company can fill.
If that’s the case (and if your anonymous correspondent knows why the price is about to go up), ask yourself two questions. First, why would anyone encourage more people to buy the stock? More buyers means the price will go up. Second, how does that person know the price will go up? (At least without falling afoul of insider trading laws.)
It’s a safe bet that your anonymous friend bought shares at 25 cents and wants to get a lot of people to buy shares at 50 cents and is trying to pump up excitement for the stock to attract more buyers. Nothing about the business has changed; it’s still worth 25 cents per share. Your friend doesn’t want to help you. Your friend won’t teach you how to invest in penny stocks and make money. Your friend is looking for suckers to buy the stocks they want to sell.