Penny stocks are shares issued by small companies that trade for less than $5 in the market. It is a good way for new and small scale investors to bid their chances through stocks without necessarily possessing a large amount of capital. What comes after learning what penny stocks are is the question “how to find penny stocks?”

It is important to learn the role of regulations and rules of investment as well as trading – because this understanding would make the financial trade market easily accessible. Stock markets usually work with large investments for a longer period of time, but it is not accessible to everyone. Simply put, if you don’t have deep pockets, then stock trading might be far from your reach. However, securities such as penny stocks make these things available to the general public who do not have huge amounts of income. Count the years it takes for your investment to turn into actual returns within the stock market and you will realize the crucial role small scale investment plays for small investors.

Stock exchanges and OTC markets are the places where you can find penny stocks. Let’s look at some related inquiries regarding this particular trade type and how one can get started with it:

What are Penny Stocks?

If a small company sells/trades stocks at $5 or less, those stocks are called Penny stocks. This price limit is set by the U.S. Securities and Exchange Commission(SEC), which is an independent regulatory institute that looks after everything to do with the financial markets and securities. Initially the exchange considered all stocks that traded for $1 or less to be penny stocks. Just as every aspect of the economy is looked after by a department or authority, the SEC is appointed by the federal government in order to make sure the financial markets run fairly and smoothly.

The general assumption that goes with penny stocks is that they’re not as easily liquefiable because they are seldom traded. The small companies that mostly issue them, have rare buyers which is why it gets difficult to liquify them. This infrequent trading leads to inaccurate demand and price settings for the investors.

This is the reason why this option is not as popular as it should be. But there is volatility in all financial markets that require perceptive forecasting for the demand and value of the securities. Some penny stocks trade in big stock exchanges, but most of them are traded through Over-the-counter Bulletin Board (OTCBB). Additionally through OTC Market Groups, both of these are electronically run unlike the trading floor of the stock market. From quotations to queries, everything is done digitally without the need for any physical presence.

Is it illegal to buy penny stocks?

This question is a little twisted here and it is fair to ask this. Penny stocks are completely legal to buy/sell or trade in whatever pricing within the cap a company wishes. The real blunder happens when people start using the noble concept of engaging small investors by manipulating the potential investors.

The ultimate concept of penny stocks showcases small companies or rather any company that deals with stocks that have a low share price. The question of manipulation comes from anyone being able to trade through the OTC platforms that penny-stock-issuing companies generally deal in. A low share price can indicate many things especially when a stock is traded for as low as $5. This could indicate that the company could be starting out, might be trying to recover from a brunt, and in an unfortunate case, there might be no company at all. This means someone might be using the easy to get into rules of the OTC transactions.

When you deal in regular stocks, the stocks are listed at big Stock Exchanges such as NASDAQ and the New York Stock Exchange (NYSE), where mostly established and rising companies trade. These big stock exchanges are regulated by the SEC, meaning all companies registered with these exchanges need to comply with the requirements of the SEC. One of the common and prominent requirements is to maintain quarterly financial reports, which helps the investors and others involved to assess how the firms are doing.

In case of penny stocks, the companies do not need to fulfill any SEC requirements since they trade through the OTC. This adds to the manipulation aspect because investors do not really have any measure of proof to check or track how the companies they want to invest in are doing. This easily translates that it is fairly easy to trick people into investing in a fake company or a comparatively downhill one that will not make profits in any case. Therefore you might not be doing anything illegal but you can get stuck in legal procedures if you do not do your homework regarding the opportunities you face.

How do I research penny stocks online?

The number one thing to do is to make sure you only trust reliable sources for analysis or predictions. Steer clear of amateur advisors or analysts who seem to be focusing on any specific names, sometimes they are hired by the same company for marketing purposes. Since the internet has eased a lot of things for our convenience, it has also eased things for people who use such inventions for all the wrong reasons. There is no scarcity of fraud and fake people who try to lure you in with attractive promises that do not generally translate into reality. Make sure you are thorough with your research, before you make a significant decision.

How should a beginner go about penny stocks?

There are many tricks and twists that different potential investors need to be aware of in order to get started with penny stocks. Here are some of the main highlights you should keep in mind:

  • Research as the point above mentioned, is very important for any plan to workout well. The more aware you are of what you are getting yourself into, the better it is for you no matter how the situation turns out. Know your market, the company you are interested in and how it works.
  • There are not many protocols that look after the companies that trade in penny stocks, therefore you need to maintain that yourself. Make sure you ask the firm you are interested in for financial reports, in order to be thorough with where you are putting your money into.
  • If you are particularly interested in a company, wait and observe how it performs over a week or two, keep track of how it’s share value fluctuates and what the company is doing in order to improve the profits.
  • Penny stocks are not similar to regular stocks that need your patience. You do not need to hesitate before selling a stock back in case it is making you a profit. You are not sure where the share price will go from there, take your chances and cut the profit out.
  • It is generally advised to steer clear of shares valued lesser than 50 cents. It does not translate well for the company.
  • About 10% or less day traders actually end up earning profits because it requires quick decision making, being vigilant and smart with what the companies have in stores for them. You need to pick out the stocks that do well, and buy accordingly.

In the end, these guidelines will only help you as much as you let them signify your decisions.

How do you find penny stocks that will rise?

There is nothing you can do in terms of projecting which company will do well when you do not have insight as much as you do with regular stocks traded in the stock market. The basic rules set by the majority of analysts and professionals who are observing and forecasting financial markets are the way to get a head start. You learn more about the companies you are investing in, the people who are running it and where you see it going. There are a few aspects that can be generalized across the penny stocks to gain a little insight on when you can expect them to rise:

  • When you cross-check the financial reports, you will have an idea about how the financials are doing internally. If you see an inflow of money that generally means development, expansion or more investment leading to better share price.
  • Professional investors have deeper insight in these companies and following their line of choice is not a bad option. They are the ones with experience and knowledge within the market.
  • Focus on high and low prices on times when stocks are both on top and down. It will help you detect what stocks are making considerable gains.
  • Do not focus on the market share of a particular company and rather on the size of the market. A small percentage of a huge market can bring more returns than a larger percentage of a smaller market.
  • Higher market share or market share on the rise clearly indicates that the company is doing well, its performing better than expectations and thus share price will elevate.
  • Lastly, the credibility of the company owners/higher management matters. If their previous experience shows they have done good work handling other companies, it’s a positive sign.