Any stock trading over-the-counter (OTC) at a price under $5 is considered a penny stock. These stocks are commonly considered the playground of the stock day traders, which makes it difficult to hold them in a portfolio for any length of time owing to the wide price swings active trading generally induces. There are many types of low priced stocks. Some represent small young companies, while others are from mature companies that are failing. There are even low priced stocks that are empty legal entities that used to be companies. The underlying companies are now bankrupt and the legal corporate shell continues to be traded by market makers until a new company merges into it.
Open an account at a reputable online brokerage firm that supports trading. These firms have low transaction fees, interactive stock screeners, interactive price charts, profit and loss tracking for tax purposes, and trading tutorials including paper trading programs that allow you to practice before committing money.
Learn technical analysis of stock price charts. This skill is vital to understanding the price movement of low-price or penny stocks and is a standard tool in stock trading.
Watch for sudden swings in price and release of several news items that seem to hype the stock. These are signs that someone is pumping the stock and the price may rise for a few days until large selling starts. This is what is known as "pump and dump" and it catches a lot of inexperienced traders buying when they should be selling.
Pay attention to increases in the authorized number of shares and the number of shares outstanding. These are numbers that you can obtain from the transfer agent handling the stock, and if they rise, the stock price will likely fall.
Ignore the babble on stock trading bulletin boards. The active posters are generally talking their positions. The bashers are trying to scare you into selling your stock and the pumpers are trying to play on your greed and optimism to get you to buy. Also ignore the email hot stock promotions because they tend to feed into pump and dump cycles.
- Take the time to read the quarterly and annual reports of the companies whose stock you wish to trade. These can generally be found on OTCmarkets.com, the self-regulated over-the-counter exchange (SRO) where small stocks trade. Consider this website an important tool in your daily due diligence because it carries important news regarding the quality of disclosure compliance by the companies trading.
- Bernard Baruch, a famous Wall Street investor and trader, claimed that he became rich by buying too late and selling too soon. This is excellent advice for anyone trading stock. Holding on to a stock because you hope it will rise some more in price is a good way to lose the profits you already have. Day trading success relies on numerous trades for small profits, so when you have a profit, don't be afraid to take it.
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.