How to Trade Pennystocks

Penny stocks are very volatile.

According to The Motley Fool, penny stocks refer to companies whose stocks trade below a share price of $5 and whose market capitalization is under $500 million. If you are just a starter in stock trading and do not have sufficient time for in-depth research about a stock, it is very risky to start with penny stocks. However, if you know the basics, know what you are looking for, have an experience of at least a year in stock trading and know your way around a company's financial statements, you can earn a lot by separating these small-cap stocks and investing in them.

Instructions

1. Get experience by trading in mid- and large-cap stocks. Be familiar with financial statements and how to read them before you attempt to trade in penny stocks, the magazine advises. Understand the basics of cash flow and market capitalization and how to link the news articles with share prices.

2. Understand the basics of penny stock trading. Penny stocks are the most volatile of all stocks and can easily be manipulated. These companies normally do not have a good track record of financial performance. According to stockexchangesecrets.com, liquidity can also be an issue with these small companies. However, these stocks are likely to decline in value like other stocks over time and simultaneously likely to double or triple in value.

3. Trade penny stocks through two stock exchanges namely the OTC: BB or Over the Counter Circular Board and Pink Sheets. In case of OTC: BB, the Securities and Exchange Commission (SEC) has made it mandatory for the companies to file their financial reports. In case of the Pink Sheets, filing financial reports is not mandatory unless they have three hundred or more financiers. You can thus get access to authorized data in OTC: BB before making the investment, whereas in Pink Sheets, you cannot. This means it is safer to trade in OTC: BB. Determine where your local OTC: BB is located and start trading.

4. Look for companies that have a consistent generation of cash and whose free cash flow increases over time and avoid those with heavy debts. Choose the stocks with low share prices compared to their book value. According to the magazine, you should restrict your investment in such stocks to 5 percent of your portfolio to avoid the high risk.

5. Research the bid-and-ask price connection for penny stocks. While purchasing penny stocks, you will need to pay the ask price and while selling, you will need to know the bid price. These prices will not be the same as the real value that the stock is trading currently. According to stockexchangesecrets.com, you may find it hard to buy a penny stock if there's high demand because the price will keep increasing very fast, and conversely you can encounter problems trying to sell the stock at any price if there's no one trading it. Trading penny stocks you will earn the difference between the bid and ask prices, which is referred to as the spread.

6. Study and predict chart patterns and take advantage of them. According to cheapstocktrading.org, virtually all stocks follow predictable patterns. Study the patterns and cycles before trading, so that you're more familiar with cycles and possible opportunities to trade.

Tips & Warnings

• Do not trade in penny stocks without experience.

References

• Straight Talk on Penny Stocks
• How to Trade Penny Stocks: Understanding the Risks
• What are Penny Stocks