Saturday, May 10, 2008

Learn More About Penny Stocks


Learn More About Penny Stocks

Penny stocks are a great investment opportunity, if you are willing to take more risk than most investors as these stocks are the ones with the highest risk. The simple description of penny stocks would be that penny stocks are all stocks that trade for less than $1, or sometimes up to $5. Most penny stocks have only a few million dollars in net tangible assets and have a short operating history. I must emphasize that stocks bellow $1 are not my favorite, for a simple reason that this means those companies are probably in trouble. You see, companies whose share price stay bellow $1 for a period of time get removed from Nasdaq, and they continue trading on OTC (over the counter) market.
The first and most important thing you should know about penny stock is that they are highly volatile. Basically, if you invest in penny stock, you should always be prepared for the possibility of losing the whole investment. So why people still invest in penny stocks so much? Well, because of the incredible return that penny stocks offer. These stocks can easily jump 20-30% in a single day, and even more. Once I invested in penny stock that jumped 87% in one day, and I sold the day after. Unfortunately, I didn't have too much money invested, as I didn't want to take such a high risk. The company I invested in had a drug in clinical trials. That is always a great risk because whenever one phase of clinical trials proves to be successful stock price usually jumps substantially, however, if the clinical trial gets suspended (which is usually more probable) shares can easily lose over half of their value as soon as the news is released.
Also, an important thing to know is that penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. But this can be avoided by not buying stocks that have low trading volume.
It is very easy to buy penny stocks. All you need to do is to open an account with one of the online brokers. There are plenty online brokers on the internet, so you won't need to research too much to find the one that suits your needs the best. Just keep in mind that if you want to trade penny stocks it would be the best to go with the broker with low commissions. Usually depending on the amount of money that you plan to invest and number of trades that you will execute each month, you can decide which broker is right for you. For example if you don't have a lot of money to invest, go with the broker with no margin limit, however this one will usually have higher fees. If you have a lot of money to invest go with the broker with smaller fees. I have came upon online brokers that let you make real time trades for only $5, however you have to have at least $100,000 in your account.
Probably a good choice would be Sharebuilder because they let you Buy Stocks for $4 (this is for automatic investments, real time trade is $15.95), have no margin limit, and no inactivity fees! And overall Sharebuilder is by far the best choice for beginner investors. They do have some limits, but in my opinion (as I have used their services for years, along with Ameritrade) they are a great choice for beginner to intermediate investors. Ameritrade is more for serious investors with somewhat lower real time trade fees, but with inactivity fees, margin limits, maintenance fees, etc. Click here to see a comparison table for online brokers.

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