4 Things to Know About Penny Stocks

If you’re learning how the stock market works, you may have heard the term penny stocks. While there is some stigma surrounding this type of commodity, it is possible to make some money with penny stocks. Here are four things to know about penny stocks.

What Are Penny Stocks?

Penny stocks are small company stocks that are usually traded for less than $5 per share. Even though some types of penny stocks are traded on large stock exchanges, like the New York Stock Exchange, most of these types of stocks trade through over-the-counter (OTC) trades. Penny stock transactions occur through the electronic OTC Bulletin or through privately owned pink sheets. There really isn’t a floor for OTC or penny stock transactions, and quotes are usually also done electronically.

How Do Penny Stocks Make Money?

Penny stocks are appealing to many stock traders because of the potential to earn a decent return. For instance, some types of penny stocks have the potential to land you around 20% to 30% in profit. The trick to getting this type of return is to sell the penny stocks you’re holding rather quickly — like in the span of a few days — as soon as you see your percent of return increase.

What Types of Penny Stocks Are There?

Since penny stocks revolve mostly around new and growing companies that make shares available to traders, there can be many different types of penny stocks to look for when you get into stock trading. Firstly, when looking for the right penny stocks to invest in, it’s important to research the company in which you’re interested in buying penny stocks. Look for companies within high-growth industries, like technology or healthcare. This can indicate a company’s potential for revenue growth, which means a higher rate of return when you sell your stocks.

Another type of penny stock you can look into is high-volatility penny stocks. In other words, you’re looking for new company shares below that $5 threshold that have massive potential for growth. The trick with these types of penny stocks is to watch closely and sell as soon as you see a decent return potential, usually within the same day or within several days.

Common Penny Stock Scams

There are several common penny stock scams that traders interested in this commodity should be aware of. One such scam is called the pump-and-dump scheme, where promoters of a stock fraudulently inflate the price of owned stocks through misleading promotions and positive claims. Scammers do this to sell cheap stocks at much higher prices. Another scam to watch out for is what’s known as a short-and-distort scheme. This involves selling short a company’s shares and then misleading investors with negative reviews to influence the stock price to decrease.

Penny stocks come with a higher risk than most other stocks, as they are difficult to regulate and track through the SEC. However, don’t let that stop you from trying, especially if you use a reputable broker to help you with your trades.