How to Buy and Sell Penny Stocks

Day Trading Times

Volatile is the word that best describes the penny stocks market. Making a good profit can happen just as quickly as losing your whole investment. Here are a couple of things to look out for when trading in the penny stocks market.

Difficulty:

Moderately Challenging

Instructions

Things You'll Need

• Brokerage account
• Internet access
• A budget

1. Sign up with a brokerage firm. There are three options available when it come to choosing a brokerage firm.1) Full Service--these firms generally have high commission and fee structures. Their advisers are more than likely working on commission, so any information they provide regarding investment options may be biased toward the firm's or the adviser's vested interest.2) Fee Based Service--advisers working on a fee based structure are paid to gather the information needed to make smart investment decisions so there's less likely to be any incentive to steer you towards certain investments. You'll still have to pay the standard trading fees though.3) Online Discount Brokers--commission and fee charges are the lowest with online discount brokers, but this option is best left for the more experienced penny stock trader. All research will have to be done by you. Online discount brokerage firms provide no investment advisory services.

2. Do your research. Regardless of which broker option you decide on, always know where your money is going. Information on penny stocks can be found online under SEC listings, Pink Sheet listings and “over the counter” (otc) stock listings. Because penny stocks trade for less than $5.00 a share, they have minimal listing requirements, which means you’ll have to do a lot more legwork to make sure the company you’re looking at is legitimate. The majority of penny stock companies are start-up operations, so financial statements and profit/progress reports will be limited.

3. Buy or Sell?

   Figure in pricing factors. Depending on which broker option you decide on, most pricing factors will remain constant whenever a trade is made. The spread (the difference between the buy and sell price) is pretty much a built in loss incurred whenever you buy a share of stock. Spreads for penny stocks can range anywhere between 25 to 100 percent so you definitely want to know what amount of spread you’re working with when figuring profit margins.Another factor to consider with penny stocks is that there are two bidding prices and two asking prices for each stock. The inside bidding and asking prices are the lowest prices. The outside bidding and asking prices are the highest.

4. Watch for stock manipulation tactics. The convenience of internet day trading has not come without its drawbacks. This is especially true where penny stocks are concerned. Less reputable brokerage firms, individual investors or groups of investors can be notorious for unethical practices that lead investors to make bad investment decisions.Three well known tactics currently being used are :1) “Pump and Dump”–this tactic is carried out through false press releases, websites, newsletters and bulletin board messages. Manipulative firms or investors post false information about a company for the purpose of driving a penny stock price up or down.2) Boiler Room Practices–brokerage firms employ sales tactics where investors are contacted by phone and coerced into making investments that the firm itself has a vested interest in.3) Biased Brokerage Analyst Reports–company stock information may be skewed depending on whether or not the brokerage is carrying a large inventory of a particular stock.

5. Penny Charts

   Consider the risks. The penny stocks market is the highest risk investment you can make in the stock market. Though cheap to buy, penny stocks can be hard to sell if no one is in the market for the company shares you’re holding.Also, share volumes for penny stock companies are typically low, so any “flow” of buying or selling for a particular stock can substantially raise or lower its price.

Tips & Warnings

• Set goals for solid returns. Know how much you want to make off of a particular investment. Once that goal is met, move on.

• Do your research on sites that don’t have a vested interest in the market.

• Some brokerage firms add a markup price to your stock purchase to make up for the cost of holding the stock in their account. Find out if there is a markup fee, and if the fee is on a per transaction basis.

• Avoid paying heed to any coercive tactics or information regarding a penny stock.

• Make sure the trade confirmation notice that you receive from your broker lists the actual terms of the purchase. Less reputable brokers can alter your confirmation notice so as to avoid registration law requirements.

• SEC filings may not show accurate information on a company if the company is filing false reports. Read them with caution.

Resources

• Pink Sheets - Electronic OTC Markets
• North American Securities Administration Association
• OTC Bulletin Board