Penny Stock Investing – A Penny For Your Thoughts?

For investors with not a lot of capital to stake in shares of companies like Google or Apple, there are few attractive investment opportunities in stocks and equities. However, here’s a thought for investing in the stock market with a relatively small stake. Penny Stocks!

These stocks are particularly attractive because of the possibility of owning large quantities of a stock for just a small investment.

Read on to find out how you too could benefit from Penny Stock investing.

WHAT ARE PENNY STOCKS

Penny Stocks are stocks that trade at or below $1. Sounds ominous? It’s not always so. The notion that “Penny Stocks = bad investments” is not necessarily true!  They may either represent high-quality companies (e.g. Alabama Graphite Corp – ABGPF), companies that are in start up or venture stage (e.g. ABCO Energy, Inc – ABCE), or companies that are in distress, in default, illiquid in their trading or opaque in their reporting practices (e.g. CalciTech Ltd. – CLKTF).

In addition to trading at or under a dollar, other fundamental characteristics of Penny Stocks often include: Low trading volumes, Large Bid-Ask spreads and small market capitalization.

FINDING AND INVESTING IN PENNY STOCKS

As a potential investor in a Penny Stock, you need to ensure you find the right platform for buying and selling them. Remember, while the Securities Investor Protection Corporation (SIPC) does offer you some protection while investing, that protection does not extend to investors who buy worthless securities sold by non-SIPC broker/dealers.

TIP: Only buy stocks from a dealer that is a member of SIPC.

While most exchanges, like the NASDAQ and NYSE have listings of Penny Stocks, for DIY Penny Stock investors a great place to start looking for them is via the Over-The-Counter Market (OTC). A particularly useful characteristic of the OTC is that they tier their stock listings based on the integrity and quality of the stock.

  • OTC-QX stocks are classified as “The Best Marketplace” for well-established companies
  • OTC-QB stocks are in “The Venture Marketplace” – meaning they are newer companies with relatively unproven business models
  • OTC-Pink is “The Open Marketplace”, and may include Penny Stocks of lesser known companies, or those that are distressed or may not be known for full disclosures of their accounting or business practices

TIP: Where possible, stay away from OTC-Pink stocks with “Limited Information” or “No Information” designations.

 

TOOLS OF THE TRADE

Before selecting a Penny Stock to invest in, DIY investors should conduct diligence on the target company. The OTC offers a free screening tool to help you narrow your list of potential candidates.

tool1

You may screen them on a number of parameters, including price range and Tier.

Another great tool available to DIY Penny Stock investors is a stock screener from Finviz.

This tool allows you to apply a much broader selection of filters to screen stocks that interest you.

BUYERS BEWARE!tool2

While Penny Stock investments can pay off in a big way, they could also lead to huge losses. Because of that, do your diligence and only invest in higher-quality Penny Stocks. These stocks could also be more sensitive to market volatility, so be prepared to sell quickly – as soon as you’ve made a decent profit.

Parting TIP: Whatever you do, DO NOT make Penny Stocks a large part of your retirement portfolio, and don’t stake large positions in any single stock!

 

 

  • I’ll let readers know how the OTC classifies and lists it’s stocks (QX, QB and Pink), so Penny Stock investors are aware of what to look for when making their choice of investments
  • I’ll introduce some screening tools that Penny Stock investors can use to select target stocks

CLOSING CAUTIONS

  • I’ll close with words of caution that while Penny Stock investments can pay off in a big way, they could also lead to huge losses
  • Because of that, do your diligence and only invest in higher-quality Penny Stocks

 

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