How to Invest in Penny Stocks & Investors

While most stocks are priced in dollars, a number of stocks trade below that dollar threshold. These stocks are generally referred to as penny stocks, and in some cases they can be a good way to make money. As with any stock market investment, however, you need to exercise caution. Penny stocks are often highly volatile, and their low market capitalization makes them particularly vulnerable to downturns in the market. Dedicating a portion of your portfolio to penny stocks can make sense, but these stocks should not form the bulk of your stock market investment.

Things You'll Need

• Financial publications

Instructions

1. Pick up a copy of the Wall Street Journal, Barrons, Investors Business Daily or another financial publication. Use a publication with an extensive stock table section, since many penny stocks do not trade on the major indexes, trading instead on the Over-the-Counter, or OTC, market.

2. Review the stocks trading for under a dollar and start to research those companies. You can use financial tools like CNN Money and Yahoo! Finance, as well as financial publications like the Wall Street Journal. Keep in mind that many of these stocks have no earnings, so it can be difficult to evaluate them on the basis of earnings growth. You can look for news stories and reports regarding promising products in the pipeline. If one of those products takes off the stock might do quite well.

3. Check your total stock market investment and determine how much you want to devote to penny stock investing. Investing in penny stocks is more akin to gambling than true investing, so it is best to keep your exposure small. If one of the stocks you buy takes off, you can lock in a good profit. As long as you keep your exposure small, your overall portfolio will not suffer a major hit, even if the company goes out of business.

4. Contact several mutual fund companies and request portfolios for their low priced stock funds. Many mutual fund companies have funds devoted to penny stocks and other low priced stocks. Using a mutual fund is one way to reduce the specific stock risk that comes with the penny stock market.

5. Open an online brokerage account if you do not already have one. Log on to the account and go to the trading menu. Enter the ticker symbols of the penny stocks you wish to purchase, along with the number of shares you wish to transact for each one. Review your order carefully and make sure you have enough cash in your account to cover the purchase price plus the commission.

6. Complete the mutual fund application if you prefer to use a low priced stock fund instead of buying individual shares. Send the completed application, along with your initial investment, to the address listed on the form.

References

• The Motley Fool: Why We Love Wild Penny Stocks