Penny stocks are small public companies that trade their shares for less than $5.00. These stocks are popular in the United States and Asian stock markets. They are not priced on the trading floors of stock exchanges but on over-the-counter exchanges or off-exchanges. Investing in penny stocks carries a higher risk compared to investing in established stocks. However, because of their low prices, they lower the entry barrier to stock investing and also allow investors to snatch or speculate on companies with high growth potentials.
Penny Stock Investing: A Guide on How and Where to Buy Penny Stocks
How to Invest: Important Pointers to Consider
It is important to highlight the fact that penny stocks have advantages and disadvantages. The core benefit of investing in them centers on acquiring shares of companies that have the potential for high and rapid growth. However, based on several instances, this is not a universal and absolute fact. Most penny stocks can have high volatility and low liquidity. The concept of trading single-dollar stocks has also enticed fraudsters and scammers. Below are pointers and a step-by-step process detailing how to select and buy penny stocks:
Step 1. Research Penny Stocks: There are reputable providers of information about penny stocks. The most popular ones include Yahoo! Finance, Benzinga, PennyStockHub, and OTC Markets. Both Yahoo! Finance and Benzinga also maintain active lists of top-performing penny stocks. 5paisa.com has a list of penny stocks in the Asian markets. Several brokers also list penny stocks available on their platforms.
Step 2. Conduct Due Diligence: Penny stocks heighten the risks of stock investing. It is important to conduct thorough due diligence through research. The general rule is to select companies with a sizable amount of provable information. Do not depend solely on company-provided resources. It is important to collect and analyze information that can be verified or cross-referenced with other information providers.
Step 3. Define Risk Tolerance: Different investors have different risk profiles or risk tolerance. Penny stocks can have high volatility and low liquidity. However, because of their higher risks, they can also have a higher return potential. These stocks are suitable for aggressive investors with a high risk tolerance and would not mind temporarily or completely losing their capital due to price movements.
Step 4. Set Specific Limitations: An investor interested in buying penny stocks should only invest the money he or she can afford to lose. It is also more practical to start with very small position sizes until an investor becomes more experienced. A clear exit strategy for each stock is also important. This involves setting a price target and stop-loss level to help guide when to sell penny stocks to gain profit or cut losses.
Step 5. Purchase Penny Stocks: There is a sizeable number of penny stocks that are not traded on national stock exchanges. Most can be bought over the counter. Some are traded through selected full-service and discount brokers. There are also brokers specializing in selling or trading penny stocks. It is important to look for regulated platforms and select the one with the best costs, research tools, and trading features.
Where to Invest: Main Platforms for Investing
There is a huge selection of penny stocks to choose from across different stock markets. Remember that these stocks are popular in the United States. However, in other markets like India and Southeast Asia, companies that trade their shares for less than $5.00 have also been considered penny stocks. Nevertheless, when it comes to the question of where to buy penny stocks, investors have two options to choose from. These are over-the-counter market and brokerage firms.
1. Over-the-Counter
There are decentralized networks of dealers that enable direct trade transactions between two parties. These are called over-the-counter markets. These markets sell a range of securities that are not listed in national exchanges. Penny stocks are also prevalent in these markets. Take note of the following popular OTC markets for buying penny stocks:
• J. P. Jenkins: One of the more popular OTC markets in the United States is J. P. Jenkins. It provides a platform for both unlisted companies to trade their shares and investors to purchase or liquidate unlisted stocks.
• Pink Open Market: The OTC Markets Group maintains the Pink Open Market. This avenue trades securities of high-risk companies. Some legitimate companies are listed but there are more shell companies listed.
2. Brokerage Firms:
The more convenient route to investing or trading penny stocks is through brokers. Most modern brokers have online-enabled platforms for hassle-free transactions. Some have tools and educational resources. It is still important to note that not all brokers offer penny stocks. Below are the three categories of brokers that trade penny stocks:
• Full-Service Brokerage Firms: Several traditional brokers that provide full-service brokerage also provide penny stock trading options or opportunities for their clients. Examples include Merrill Lynch and Morgan Stanley. A full-service broker provides its clients with dedicated financial advisors for thorough guidance.
• Popular and Discount Brokers: Established brokers in the U.S. like Charles Schwab, Fidelity, and Interactive Brokers offer penny stock trading through their standard accounts. These brokers do not have an exhaustive offering and they might have limitations on certain penny stocks traded on over-the-counter markets.
• Specialized Penny Stock Brokers: Some brokers provide a more specialized focus on penny stock trading. Robinhood caters to specific OTC markers. 5paisa.com is a discount broker based in India that has an exhaustive list of penny stocks in India. Trading 212 is a registered broker in the United Kingdom that offers global stocks.
It is important to choose a broker that has a strong overall reputation and specific experience in handling penny stock transactions. An ideal broker has reasonable fees and tools that can help in researching and setting specific limitations. Take note of transaction fees and bid-ask spreads. These costs are often higher for penny stocks than more established stocks.
