How do I Invest in Penny Stocks?

Penny stocks are among the riskiest investments you can make.

Penny stocks are among the riskiest investments you can make.

Everyone has a story about the penny stock they bought that made them a big profit. Everyone also has a story about the fish that got away. Both stories should be viewed skeptically. Many savvy stock traders enjoy trading penny stocks because the action moves fast and requires professional-quality financial analysis, company research and technical analysis of the price charts. This is the reality of investing in penny stocks. It requires a lot of research, constant monitoring and the personal ability to restrain emotion, optimism and greed.

Open an account at a reputable online brokerage firm that accommodates day traders. Look for interactive stock screeners, interactive price charts, access to the market makers' quote system (NASDAQ Level II) and real-time quotes.

Learn to make use of the online trading tools available, particularly the interactive price charts and the NASDAQ Level II quote system. Technical analysis of price movement is vital to trading penny stocks.

Familiarize yourself with the OTC Markets website where you will find a complete tutorial on the pink sheets market. This is a self-regulated organization (SRO), or exchange, and is the venue where all Pink Sheet or penny stocks are traded.

Ignore hot stock tips from email stock promoters, and when your friends tell you about a stock that is making them money, by the time they tell you about it the stock has probably peaked and ready for consolidation.

Pick several stocks and paper trade them before committing your money. Take your time to learn the trading pattern and rhythm of the stock, and keep your cash available so you can quickly take advantage of any price dips.

Tip

  • Many good penny stock analysts provide trading ideas on a subscription basis. Ask your friends, or other traders on the investor bulletin boards, to recommend websites and services they find helpful.

Warning

  • Never borrow money to use to trade stocks and never trade with money you can't afford to lose. If you use money that you will need in the foreseeable future, you may be forced to sell out a good position during a temporary dip in price in order to pay bills. Sometimes the difference between profits and losses is the simple ability to hold on to the investment for a couple more days.
 

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