How to Invest in Penny Shares
Penny stocks (also known as microcap stocks) are low-priced stocks which trade below $5 a share. They are usually highly risky, which is why the stock price is low. Many times, the companies that have issued the stock were not allowed to join the major stock exchanges due to low capitalization or poor fundamentals. The challenge is figuring out where to research and buy and sell these penny stocks if you can't trade them on the national exchanges.
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Instructions
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Review the risks of investing in penny stocks. Broker and dealers in penny stocks are required to provide penny stock investors with a document describing the many risks associated with purchasing penny stocks. See Resources for a copy of this document and read it carefully before investing any of your hard-earned money.
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Ask your broker if he or she deals in penny stocks. Not all brokers do. If they don't, try one of the many discount brokers such as Scottrade, Ameritrade or E-trade. They usually deal in penny stocks.
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Go to the OTC Bulletin Board. The OTCBB (OTC stands for Over the Counter) is a national penny stock exchange, like the New York Stock Exchange or Nasdaq, except it is only for penny or micro-stocks. This is a good place to research penny stocks and look up price quotes.
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Go to the "Pink Sheets." The Pink OTC Markets, formerly known as Pink Sheets, is another electronic quotation system for penny stocks. Like the OTCBB it publishes quotes from broker-dealers who buy and sell penny stocks. The requirements that companies must meet to be listed on either the OCTBB or Pink Sheets is very low.
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Choose a company you would like to purchase and note the ticker symbol. Provide this symbol to your broker and place the order for the number of shares you would like to purchase.
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Place a limit order. A limit order is different from a market order in that it gives you the ability to control the price you are willing to spend on the stock, whereas a market order purchases the stock for the best available price at the time. Penny stocks are not as liquid as small-, mid-, and large-cap stocks, so the spread (difference between the bid and ask price) is larger. This could affect your ability to get the exact price you want. The only way to make sure the broker only trades at the specified price is to place a limit order.
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Tips & Warnings
Penny stocks are inexpensive to buy, but people can lose a lot of money with penny stocks, too. A reminder: read the disclaimer listed in the Resources.
