Basically, a penny stock is defined as any stock that trades below $5 per share. Many people believe that these type of stocks trade at a share price of less than $1, but in reality the Securities and Exchange Commission uses the $5 threshold. Penny stocks tend to trade infrequently and may fluctuate wildly in price; so if you’re new to investing you may be better served focusing on other stocks and investments before dipping your toes in the penny stock pool. For starters, the infrequent trade of penny stocks can make selling your shares more difficult; what’s more, it can be hard to accurately price these stocks, so accurate quotes can take some work to come by.
Trading Penny Stocks
If you decide to trade penny stocks be sure to research the market to see what the demand is for the penny stocks you’ve selected. Determine whether or not you will be able to successfully sell it in order to close out your position. If you are working with a broker, he or she is legally required by the Securities and Exchange Commission to give you a statement of investment goals explaining why his or her firm feels the determined penny stocks will yield a promising investment for you.
When you place an order to buy a penny stock your broker will provide you the offer, bid and compensation on the stock trade. The term “offer price” refers to the wholesale price at which the dealer is selling the stock to other dealers. A “bid” is the wholesale price your dealer is willing to buy the stock from other dealers. “Compensation” is the trade fee a dealer will receive for executing the trade. When it comes to bids and offers, the difference between these prices is known as the dealer’s “spread.” A profitable transaction occurs when the bid price of your stock is greater than the price of this spread and your dealer’s compensation. After you purchase a penny stock, your brokerage firm is required to send you a monthly account statement which details an estimate of the value of each penny stock in your account.
Whether you work with a broker or manage penny stocks on your own, it is worthwhile to do your research and have experience in other types of stocks before venturing into these trades. Many individuals report high gains from the successful trading of penny stocks, but it definitely requires a significant amount of skill and experience to take full advantage of the opportunities penny stocks can offer. For more information, check out the Advisory Services InvestorPlace offers to it users – these services cover a variety of topics and can help you learn more about the topic you’re interested in, penny stocks or otherwise. Plus, the “Penny Stocks” section of our website offers detailed information on the current penny stock trade for you to use for your benefit.