Everything you should know about cheap penny stocks
If you have to be successful in investing in penny stocks, the ability to find and buy cheap penny stocks is no doubt important because they increase your profits. However in picking your stocks, it is important to understand the overall market to be able to place your selections in the proper context. Moreover, price should not be your only criterion and you shall never buy merely because you consider a particular stock to be a cheap penny stock. Because penny stocks are high-risk investments, every bit of information that you can gather is important because it helps you to stay right on top of the market.
You should begin by understanding what a market-maker and what his role in enabling you to buy cheap penny stocks. The market maker is a market intermediary who buys and sells penny stocks normally in trading lots of 100 shares Market-makers are permitted to set their own prices for every trade and, if you are dealing with a good market maker, you stand to gain both in terms of buying and selling cheap penny stocks and liquidity… Naturally the more market-makers for a particular stock, the better it is for the investor. the names of market-makers are generally listed on the pink sheets alongside each stock.
Sadly, market manipulation is fairly common especially for cheap penny stocks and you should text and you should next learn how at stocks can be manipulated. Normally, only one crooked market maker will be involved and the typical procedure is to acquire a very large quantity of a particular cheap penny stock. He then proceeds to stir up the excitement for the stock in the market by either fabricating information or vastly exaggerating the growth prospects. He can even create fictitious financial news items which are then planted in various forums on the Internet. As soon as the stock price rises sharply and enough innocent investors have been duped, the manipulator will proceed to liquidate his entire holding at a nice profit.
Penny stocks hit the market by way of what is known as a Initial Public Offering (IPO) which is the first offering of stock by any company to the public at large and any company that is looking for public investment needs to start with this process. You should remember that every large business originally started as a small business and a penny stock issued by a start-up business is not necessarily a bad investment. In fact, a promising business with good prospects may enable you to pick up cheap penny stocks in the process of the IPO. This relative cheapness of the offering may be due to the fact that the stock is deliberately priced below a fair value to attract buying interest.
You should next learn a few basics about buying cheap penny stocks. Brokers will often not work on a commission basis but will attempts to learn their returns in the difference between the buying price and the selling price. When it comes to bid and ask prices, you will see two prices which are known as the inside spread and the outside spread. Most of the market action will take place somewhere between these two prices. Remember that brokers do not work for your benefit but for their own profit to this does not imply that every broker is going to work against you. This is why, to facilitate your hunt for cheap penny stocks, you have spent some time in locating a reliable and quality broker. Not only will a good broker of provide you with complete documentation but he can often offer invaluable advice and recommendations.
Stocks that quote at a price below five dollars is generally regarded as penny stocks but greatly cheap penny stocks can cost as little as a few cents apiece. Penny stocks that are not coated on major stock exchanges are often quoted on over-the-counter exchanges like the Pink Sheets. You should that SEC regulation and do not apply to these over-the-counter exchanges and companies are not obliged to provide relevant financial information about themselves.
Sometimes companies will list an IPO on the Pink Sheets just to be able to get their stocks into the market and look for a listing on a major exchange as soon as they have met the qualifying criteria. These are genuine businesses and generally offer a better risk than purely speculative securities. Once again, if you are bargain hunting for cheap penny stocks, you should look at these kinds of businesses to improve your chances of success.
You should be extra careful and thorough in researching investments in cheap penny stocks because you can then limit your risk to whatever extent is possible. Information is unlikely to be readily available and you will have to use your ingenuity and your resources to carry out the necessary analysis. The Pink Pages divide the listings into four categories namely current information, limited information, no information and caveat emptor (buyer beware). A company that provides complete information comes into the current information category whereas a company that has provided some incomplete information is put into the limited information category. Companies which are cheap penny stocks in the last two categories should be looked at with a great deal of caution. Unless you have substantial information to the contrary, they are best avoided.
There are some ways in which you can determine the potential upside on cheap penny stocks. Start by looking at 15 to 20 stocks at one time. Then eliminate the stocks that belong to industries that are in trouble or not performing well. All this requires is some commonsense and access to information that is readily available. Then eliminate the stocks that are quoting below a price of one dollar. If there are promising stocks here, you can always buy when the one dollar price is reached and still make a good profit. Check that the stock price is on an uptrend by using the 200 day moving average. Finally, you can lower your risk by finding cheap penny stocks that have some institutional shareholding…