(FinancialHealth.net) – Contrary to the name, it’s very rare for a penny stock to actually cost a penny. The United States Securities and Exchange Commission (SEC) considers any stocks that cost under $5 per share to be penny stocks. Penny stock shares are typically shares of small companies, and they trade via the pink sheets or the over-the-counter bulletin board.
You won’t find people trading penny stocks in major exchanges. Because the SEC doesn’t have as strict a requirement for over-the-counter bulletin board stock trades, you are taking a pretty big risk investing in penny stocks. However, if you invest in penny stocks and the company moves into the big leagues, you could make a fortune.
When it comes to penny stocks, newbies have a lot to learn. Before you call your broker, check out these tips.
1. Take What You Hear With a Grain of Salt
Penny stock promoters make a living selling penny stocks, and it’s common for them to tell potential investor things like “this company is about to blow up” or “this company’s product is going to change the world,” just to make a sale.
While that may occasionally happen, the reality of it is if penny stock companies were real companies that were poised to experience a huge jump in sales, their stock would be traded on the NYSE or major exchanges. The bottom line is, when you invest in penny stocks, you need to do your own research and invest in companies that you believe in.
2. Keep Your Expectations Realistic
There’s a chance that your $1 shares will jump to $10 per share in a matter of days, but it’s a lot more likely that you’ll see small increases. Expect your increases to be more around the $0.50 to $0.75 range, which is more realistic, and you’ll be happy when you do find a stock that’s value increases rapidly.
3. Understand the Risk
Penny stocks can plummet just as quickly as they rise, and that means that you could potentially lose quite a bit of money. The key is to diversify. Invest in penny stocks if you wish, but don’t make penny stocks a major part of your investment portfolio. Also, don’t invest too much money in one penny stock company. Invest in several penny stock companies to lessen your risk.
4. Keep a Trading Journal
Profitable traders are methodical people. They keep journals detailing their buys, wins, and losses so they have something to reference when preparing to make their next trade. You can keep a written journal or you can use one of the many online website devoted to tracking stock portfolio information and personal finances.
Trading penny stocks is a risk, but the risk doesn’t mean that it’s not an investment that’s worth your time and effort. If you want to start purchasing penny stocks, do your own research, and learn from your experience.
~Here’s to Your Financial Health!
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