What are Penny Stocks?
Find out everything you need to know about Online Trading and how to get started on the Stock Market
If you’ve ever considered dabbling in the stock market, you may have heard about penny stocks. Many who are already familiar with the stock market have mixed views on penny stocks. Some say they just aren’t worth investing in, while others have done very well with penny stocks alone, amassing a small fortune when the market is favourable.
Penny Stocks explained
Put simply, penny stocks are stocks that don’t actually cost a penny per share — but might not cost much more that, either. Typically, a penny stock is any stock that is priced at $5 or lower per share. The majority of penny stocks tend to be priced under $1 per share.
Penny stocks are favored by some investors because they don’t carry as large of a risk as higher-valued stocks do, unless you were to invest thousands without seeing a substantial gain. However, if you pick the right stock and invest an ample amount, you could see your investment double, triple, and even quadruple within just a few days — or even a few hours. Timing is everything with penny stocks, which is why some investors believe they actually carry the biggest risk of all.
Buying Penny Stocks
Even though penny stocks aren’t considered high-value enough to be listed on the major stock exchanges, you can still purchase them through a stockbroker or a trading site online. Before deciding to buy any particular penny stock, you should attempt to learn as much as you can about the stock and the company. This can often be difficult, as most companies that offer penny stocks don’t have a great deal of information to yield in the financial sense, because the companies don’t have to file with the SEC when their stock is valued so low.
You can often find penny stocks that are too risky to invest in by discovering certain warning signs, such as whether they are traded over the counter (OTC) or through a regular market exchange. OTC stocks aren’t subject to the same scrutiny as market exchange stocks, which makes them riskier. Additionally, if the stock history shows a steady decline, it could be a sign that the company is close to bankruptcy. Lastly, penny stocks that are hyped by third parties is often a clear sign that the stock is not a worthwhile investment.
The Benefits of Investing in Penny Stocks
Take the time to learn more about penny stocks before deciding to invest. Once you feel that you have a good understanding of how to invest in penny stocks, you can take the leap forward and hope for the best. Many investors enjoy risking their finances on penny stocks because the rewards can come quick and come large. A penny stock can jump from 10 cents a share to $10 a share within a two-week time span, which means big reward for the investor.
Gains can be even larger, but finding that perfect penny stock isn’t always an easy task. Even if you play it safe at first and only invest a little, if the stock doesn’t perform as expected, you may be left sitting on a lot of worthless stock nobody wants to buy, and subsequently you’ll be unable to recoup your initial investment.
In conclusion, before investing big in the stock market, you may want to try your hand at penny stocks first. But the key rule is to be informed as possible before jumping on any stock, and don’t stay invested long-term. If a stock isn’t performing as expected, make the move to another before you are left with a stock you can’t sell. Hopefully, you’ll guess right — and receive a big reward for your efforts.
Trading explained the simple way…
How to Buy Stocks?
1 Understand the stock market. In order to invest properly, you need to understand what the stock market is and how it operates. Here’s a basic rundown of terms and processes:
Stocks. Also referred to as “shares” or “equity,” a stock is a certificate that gives the holder part-ownership of a company. In order to raise money, a company releases shares that the public can buy. Each share represents a small percentage of ownership in that company.
Shareholder. This is a person who owns shares in a company. A shareholder can hold as few as one share and as many as millions. Shareholders are given votes in the company and earn a percentage of the profits.
Stock Market. This is where shares of companies are bought and sold. It can be a physical place or a virtual market. The three primary stock markets in the US are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automatic Quotation System (NASDAQ). All are accessible through stockbrokers, both by phone and online.
2 Familiarize yourself with different kinds of stocks. There are two main types of stocks: common and preferred. Common stock is the form of stock most recognizable to newcomers. It is a share in a company. Common stock can give some of the highest returns in investing but comes with the largest risk.
Preferred stock gives ownership like common stock does, but does not bestow voting rights. The dividends paid out by preferred stock are fixed instead of variable like common stock. Preferred stock is a more secure source of dividend income than is common stock.
Stocks can also be broken down into different classes if the company chooses. Typically, a company will make one class of share have more voting rights than the other, to make sure that certain groups maintain control of the company.
3 Learn about how stocks increase and decrease in value. Stocks operate according to the law of supply and demand. As the demand for a stock increases and more people are interested in buying than selling, the price of the stock goes up. This is because there is less supply of the stock and each share becomes more valuable. Stocks generally increase in demand as the company succeeds, and their demand lowers if the company performance suffers.
Demand is often based on expectations of future performance. When investors feel that the company will be performing better in the near future, demand will increase.
It is impossible to predict with any certainty how the overall stock market will behave. This is why there is so much risk associated with this form of investment.
4 Find out about dividends. Dividends are a benefit paid to shareholders at the discretion of the board of directors.
Stable companies often pay dividends to keep investors happy when their stock price does not rise much.
Dividends are a great way to earn “passive” (automatic) income over a long period of time.
5 Understand why you want to invest. Ask yourself why you want to invest and what you expect to gain from it. The stock market can be very volatile, and a bad day could see you lose a significant part of your investment.
Good investors invest for the long term. If you are looking to cash in right away, the stock market might not be a good place to put your money.
Don’t invest if you are trying to get out of debt. Make sure any high-interest debts are taken care of before investing in the stock market.
Successful stock investing requires dedicated time from the investor. Ask yourself if you have the time to investigate companies for at least a few hours a week. Such research is extremely important. There are many research services available to do some of the leg work for you. Look online for websites like Scottrade, ShareBuilder, Motley Fool, E-trade, TDAmeritrade, TradeKing, Morningstar, and TheStreet, to name just a few. It is very dangerous to pick stocks without first investigating them thoroughly.
Sources and Citations:http://www.wikihow.com/Invest-in-the-Stock-Market