The definition of a penny stock has changed over the years. What once meant a stock worth less than a dollar now includes stocks priced at less than $5 per share. These penny stocks are generally considered volatile and aren't traded on the major markets. Many day traders take these low-priced picks and double or triple their investment. Microcap stocks are tempting because it seems you could make a large return on investment relatively quickly, but they're also risky to trade.
If you're interested in trading over-the-counter (OTC) stocks listed in the pink sheets, you need a penny stock broker that specializes in penny stocks. You get a trading platform, listings, chart analysis and the ability to make a trade when you're ready. Although penny stocks are risky and you have the potential of losing a lot of money, the right trades can also net you big profits.
1. Penny stocks require less capital: If you're new to the stock market trading game, you may not have a lot of money to play with. Penny stocks are a good way to get started. Brokers have different minimums, but generally, you can start with anywhere from $500 to $2,000. Day trading requires several transactions, though, so a broker likely requires a higher minimum balance. With that said, you can invest a smaller amount of money to buy more penny stocks than if you were looking at blue-chip stocks that sell for much more per share on the major stock markets. Keep in mind that you are required to pay broker commissions and fees.
2. You don't have to be in New York: Although the New York Stock Exchange floor is still full of traders, you don't have to be there yourself. You can set up a trade in the morning before you leave for work, and with the right stock trading platform software that includes a mobile app, you can sell during your lunch break. It's become more convenient than ever to trade small stocks and make a profit in a day than ever before.
3. Potential for huge ROI: Profit isn't guaranteed with any stock purchase. Penny stocks are more volatile and the OTC market is rife with fraud, so there's also potential for huge losses. However, if you play the market safely and choose a stock at a low price, you could buy thousands of shares for a small amount, and then watch it double or triple in price and sell, meaning you could see returns of 300 percent. You're not likely to hit those numbers every day, so when you have losses, it will even out throughout the year. But many investors have seen big wins – even as high as 1,000 percent increases.
4. You don't have to be a day trader: There's no rule that says you have to get in and out of a trade within a day with penny stocks. If you've found a stock that you believe – through research and gut feeling – will rise over the years, you can buy in low and hold it until you're ready to cash out with a large profit. This reduces the amount of money you'd spend on commissions and fees, but you should still follow the same rules as the day trader: Have an exit strategy to reduce risk. Penny stocks are generally riskier because the companies that are trading OTC are less reliable or at least more volatile.
5. Practice: Smaller stocks with lower prices enables newer investors to try their hands at trading. This can be a good way to practice a strategy that you've already tried out in a demo account and reduce your losses. You can delve into penny stock trading without feeling as though you're competing with seasoned professionals. If you lose, you'll be losing a fraction of what you could lose with mid-cap or large-cap stocks.
6. It's easy to diversify: Because you don't have to invest tens of thousands of dollars out of the gate, you can buy a few different stocks at once and keep an eye on them, instead of only investing in a single stock. This offers the potential for you to make more money at once – even if you sell at only a 20 or 30 percent increase.
7. You're firmly planted in reality: Although you've heard stories of people making ridiculous profits off 1,000 shares priced at 50 cents per share that soared to $10 per share, you know that's a bit like winning the lottery – the odds are stacked against you. If you're satisfied with a profit of about 50 cents per share, then you're more likely to make money with penny stocks. Keeping your trades small (in entries, shares and exits), you'll stand to profit a little every day or week, and reduce your losses.
Penny stock trading is not a get-rich-quick scheme. Investing in penny stocks requires that you follow the same rules as trading on the major stock markets, and it involves more risk because of how volatile the OTC market remains. Keeping these facts in mind, you can find money in microcap stocks.