How to Invest in Penny Stocks for Beginners

Aug 14, 2018 | BEGINNER, INVESTING 101

If you’re new to investing, you’ve probably heard a lot of terms thrown around – some of which you may be fairly comfortable with, and others which may have you looking for more information.

The terms “penny stock,” “pink-sheet,” or OTC stock, come up a lot, and the information you find might be conflicting. This article will break down the basics of penny stocks for beginner investors.

Penny stocks are any stock which trades for under a dollar a share. Most commonly these stocks trade on the over-the-counter market also called pink-sheets. Some of the companies trading on major exchanges, like the NASDAQ, trade for under a dollar, but they are rare.

The first thing you need to know is that penny stocks are extremely volatile. They carry more risk than any other type of stock. Because penny stocks are not typically traded on the major exchanges, they are not subject to the same regulation as larger stocks and are therefore much more easily manipulated.

Penny stocks are typically offered by new companies with no or little record to back them up. Alternatively, some penny stocks are offered by companies who are failing and have been delisted by the major exchanges.

Because many of the large companies who currently trade on the major exchanges started out as pink-sheets, or OTC stocks, some will argue that buying penny stocks is a great way to get in on these big companies BEFORE they make it big and the stock prices climb. This is a sound point, the problem is that there is no way to know which of the many companies trading on the over-the-counter market will make it big and which will fail.

Other proponents of penny stocks use them strictly to make a quick profit by day-trading. This type of investor buys into a penny stock, and as soon as the price goes up a bit, they sell it – the idea being to make a quick profit on the movement in price. Because of the volatile nature of penny stocks, their prices can fluctuate wildly from day to day or even minute to minute. Of course, the flip side of this is that the prices also drop very suddenly and investors often lose rather than profit.

If you are seriously considering trying your hand at penny stocks, there are numerous platforms, including some offered by brokers, which allow you to “paper trade” for practice before risking your hard-earned cash.

These platforms allow you to make trades, just as you would if you were actually buying and selling stock, but without spending any money. In this way, you can see what your trades would have done and get a feel for the types of losses/gains you can make trading penny stocks.