THE FACTS ABOUT PENNY STOCK TRADING

As the name implies, Penny stocks are the stocks sold for penny which describe its low price nature. They are described by SEC as the stocks of companies that trades below the price of $5. They are the stocks of companies with market capitalization of below $200 million. They are traded in Over-the-counter market through the exchanges like Over The Counter Bulletin Board (OTCBB) and Pink sheets. This type of stock is described by its low average daily trading volume which is due to its less patronage.

PENNY STOCK CONTROVERSY

Penny stocks are highly volatile stocks which has the tendency to rise or fall even above 500% in a day. This makes the stock very profitable and at the other hand very dangerous if proper risk management is not implied. This has generated a controversy on whether it is safe to invest in such companies or not. Let us look at both the advantages and disadvantages of trading penny stocks, which will help any investor going into it to know exactly what he is getting into and how to go about it.

Advantages

• Low start up capital: this encourages investors with little capital to also participate in the business of stock trading. You can buy up to 2,000 units of shares of a company selling at a price of $0.10 with only a $200 capital.
• Advantage of high volatility: despite all that has been said about this type of stock, it did not change the fact that it is possible for an investor to earn up to 1000% ROI due to its volatility. Big companies we see today like Google, started as a penny stock but today, it is counted among the big fish. The ability of an investor to find stocks with good potentials among the penny family determines his success. This chance i must say is very slim.
  

Disadvantages

• Information problem: these small cap companies provides little or no information about their companies and its operations making it extremely risky for an investor to invest in such companies. The companies usually have no track record of financial information. They can easily change their ticker symbols or get delisted in the exchange with no notice.
  
• Volatility and Liquidity problem: due to its volatility, an investor can loose almost all the money invested if adequate stop loss position is not placed. And also it lacks liquidity (i.e. trades in a very low volume) which can make the sell of the stock impossible at times because there are no buyers.
  
• Manipulation problem: it is very easy to manipulate the prices of these stocks because of its very low price. These stocks can be bought in high quantity by some fraudsters who will then move to promoting the stock as the "hot stocks" through e-mails, TV, radio and other media. Immediately other ignorant investors put their money into the stock, this will make the price to go even higher due to the increased demand. Then the fraudsters will offload their own stake by selling them which will create a sudden fall in price making the later ignorant investors to loose. This activity is an illegal "pump and dump" scheme.

In conclusion, we have seen that there is a very high risk of trading this type of stock and as well a high reward if a successful pick is made. We will end by advising that an investor who wants to trade this type of stock should do it with caution. You need to research more and avoid giving-in easily to hypes. Make use of good risk management system and ensure you put a stop loss order on any open position. Some institutional investors invests very little percentage (like 5% to 10%) of their portfolio into the penny stock. So, it is advisable for you not to invest all your trading capital into penny stocks but some percentage of it.

5 HOT TIPS TO START STOCK TRADING

Financial stock market has remained one of the avenue where people all over the world make and multiply their wealth.
It has enough room to absorb as many with different objectives whether day-trading
for profits or for long-term investment into the stock market.

I was motivated to write this article due to received questions from people on how to start or get into the online
stock market as they claim the whole picture is still blurring to them. This brought about the aim to this article which
is to reveal the hot tips one need to be aware of and stick to for an easier
start in the business of online stock trading.

1. What do you know about stock trading? This is the first question you need to ask
yourself. You should look before you leap. Do not put your money into a
business you do not understand but put your time and energy first at learning
how it works. Take advantage of good stock trading books written to guide the beginners
and learn the stock market road before running into it.

2. A business plan: stock trading is a good business and like other businesses, it
must be started with a good business plan. Your plan must cover what you set to
achieve and how you want to achieve it. It will define whether you are a
short-term, medium-term or long-term trader. Your plan will also include how
you intend to manage your risk. In achieving your trading goal, you must have
trading strategies that will guide you on entering and exiting your trades. You
can read more on designing your trading plan through this book, “Secret
Practical Guide for Stock Beginners”, it has more in-debt analysis and
illustrations on setting up your trading plan.

3 . Practice before you invest your real money. Stock market is a risky market but you can
reduce the risk of loosing your hard earned money by first gaining the trading
experience through opening one or more of the stock simulator account. A stock market simulator is a program or
application that attempts to reproduce or duplicate some or all features of a
live stock market on a computer so that
a player may practice trading stocks without financial risk. Play the game with virtual money by owning a
virtual portfolio, test your strategies and gain more confident before
approaching the market.

4. At this stage, you are confident enough to open your real account seeing that you
have grown your virtual portfolio with your trading strategies. There are numerous
stock brokers online and you need to choose the type of broker that matches
your interest.

5. Keep a trading diary close to your table. This is very important even when you are
practicing with a virtual portfolio as it will help you to review your trades
from time to time for more improvement in your trading skill. It will also help
you to detect trade errors if they are made by your brokers for and be corrected immediately.