Stock Market Basics – Penny Stocks
In many cases, when the average person starts trading stocks, they trade what is known as penny stocks. Penny stocks is where you can learn the best lesson in stock market basics. You can do very well or really bad when buying penny stocks. How and what you buy will make the difference between the two.
What is a penny stock? A penny stock is just like any other stock that you would buy in a company. The difference is the value of the shares in the company. Basically it’s a stock that is valued less than $1 per share (some would say less than $5).
When you look into penny stocks online, you mostly see these site that tell you that they made a 300% gain on a stock trade and typically that can happen when you deal with stock shares that are less than $1. If the price per share was $0.25 and it gained $0.15 in one day (which could happen a does), you would be up 60%. Quite often stocks that are valued in this price range will have those types of moves, but what often happens is that in just a few days of gaining anywhere from 60% to 150% it will drop back down to it’s original price before it made those gains.
Penny stocks are usually companies that are relatively new and are trying to raise capital to increase the size of their business. Since they are new it can fail in it’s attempts and close their doors forever. How do you know which companies to invest in when you want to but into these types of stocks?
Research is the key. Most times it’s hard to find any information out on these companies because they are new. Most of them don’t trade on the big boards (DOW, NASDAQ), so they don’t really file their financial reports on a regular basis. In some cases you will find that these companies don’t even operate in the United States, so they don’t follow the rules of the SEC (Security Exchange Commission).
What you can do at times (which is something that I do), is to call the company and talk to the highest executive that you can to get a feel for the condition of them. You will be amazed to see how much you can learn from the person with just a few phone calls. I do have to say that if you call, you must let then believe that you are a shareholder or they’ll think twice about really talking.
Be careful when dealing with penny stocks, you can get burned more times than hitting it big. Remember, it’s estimated that nine out of ten business’ fail.
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