How to Get Started With Penny Stocks

Without due diligence, your penny stock investment is more like gambling than you may wish to recognize.

Without due diligence, your penny stock investment is more like gambling than you may wish to recognize.

The penny stock or microcap stock marketplace is often compared to the Wild West. Many investment professionals will disagree, saying it is even more lawless and dangerous. Nevertheless, there is a fascination about buying stock priced at pennies a share and potentially selling it at dollars per share -- a rare occurrence, but possible. Penny stocks include young companies trying to grow, small banks, declining companies and legally trading shells of bankrupt companies. If you can wisely research and select, you will find many excellent small companies worth your investment.

Step 1

Ignore everyone who wants to give you a tip on a hot penny stock. If they have made a lot of money on the stock, chances are it is ready for a price correction. Most penny stock traders talk their positions. In other words, if they want to goose the stock up, they run around telling everyone what a hot stock it is. Beware of hot stock tips from friends and the stock trading bulletin boards.

Step 2

Establish an account with a reputable online brokerage firm that has trading tools such as stock screeners that allow you to select stocks with certain characteristics, interactive charts for technical analysis and access to research reports. Avoid firms that tout hot stocks, because they are talking their positions.

Step 3

Learn everything you can about how to use the online trading tools. Also learn how to analyze company financials. Knowledge is your best protection in the freewheeling penny stock marketplace.

Step 4

Visit OTCmarkets.com daily. It used to be known as PinkSheets.com, and is an SRO (self-regulated organization) that tries to add a degree of reliability to penny stock information by requiring disclosure of quarterly financials, annual reports and important company news, which is reviewed for completeness and posted on its website. Beware of any company that has received a less than adequate rating symbol.

Step 5

Decide how much money you can afford to lose and deposit that amount in your brokerage account. Start trading with a small position that uses less than half of your cash balance, and take your profits early. Successful penny stock trading and investment requires a firm hold on reality and a willingness to be happy with many small trading profits rather than expecting to make huge profits on a single stock.

Tip

  • A good way to test your skill at picking and trading penny stocks is to paper trade for at least six months before you risk your money. Many brokerage firms provide this practice tool as part of their investor education activities. The benefit of using an online paper trading tool is you must make the trade, so if your decisions are faulty, you cannot make excuses or live in denial of your failures.

Warning

  • Never invest more than you can afford to lose and do not borrow money to buy stock. Even the best companies can be bashed into huge stock price losses by traders that make their money by selling stock short. The watchword for penny stock trading is "caveat emptor" (let the buyer beware) and there is a valid reason for that warning.

About the Author

Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.

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