Most people that want to learn to trade often begin on penny stock, even though they are more dangerous than the blue chips. These stocks usually have a value of less than $5. The logic is that they’re cheap. The fact that you don’t risk much money also makes them a lot of fun to trade. Penny stock trading is one way to learn the stock market but it’s also very risky.

Significance

Open a brokerage account online. Often live brokers charge too much to use their services. When trading penny stock, sometimes the stock costs less than a penny, so if you bought 50,000 the amount to buy and sell the stock might cost you as much as the stock itself. Keep the cost low for the trade when you use penny stocks.

Types

Select a nano or a micro cap if you look for a penny stock. Stocks use terms like large cap, small cap and micro cap to describe the amount of money the company has, its capitalization. It’s more difficult to find information on micro and nano cap stocks. The OTCBB (Over the Counter Bulletin Board) website often has information about different stocks.

Time Frame

Know something about the company or track the price movement of the stock. The fundamentals include things like the company’s share of the market, history of profitability and performance. When you track the movement of the stock, you use technicals to forecast the next move by how the stock performed in the past.

Identification

See if it’s on the pink sheets, a tier on the pink quote. The pink sheets are stocks delisted for a number of reasons. Sometimes they don’t file all the necessary paperwork to maintain their position on another exchange. The pink sheets got that name because at one time, the paper where their quotes appeared was pink. Many of these companies are very small and they don’t file an audited financial statement. This fact makes it tough for the fundamental investor to identify it’s strengths and weaknesses.

Size

Check out the symbol of the stock. Investigate not just the company but also the product it makes. Stocks that cost less than a penny often make nothing but are simply shells. A shell company has a symbol and for one reason or another, no active company. They may have done everything necessary to get the symbol but still look for a company with a real product to purchase and give it their name. Others are scams and a waste of money. Be aware that these types of stocks are cheap for a reason. When trading penny stocks, even though not much money is involved, its still some money and a training ground to develop skills and habits. Don’t develop a reckless attitude.

Considerations

Watch the amount of volume that your stock produces each day. The volume is the amount of shares traded for that symbol that day. Thinly traded stocks are difficult to sell since they don’t trade as frequently. You want to use a stock that has a substantial volume. That way, more people interested in buying it, you have more opportunity for movement and it’s easier to sell.

Expert Insight

Buy your stock with a limit order and sell it the same way. Always use a limit order when you trade in penny stocks or volatile stocks. A limit trade limits the amount you’ll pay for the stock or your selling price. If you’re dealing a share that’s a penny, then even the slightest movement in price before you buy can cost you all your profit or throw you into a loss. Since activity may be low on these stocks, some unscrupulous market makers might take advantage of the fact you mentioned no price and increase their selling price.