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How to Get Started Investing in Penny Stocks Published by  Tim Thomas

Investing in penny stocks can be lucrative, but it can also be risky, which is why many traders avoid penny stocks when looking for cheap stocks to buy. To find success trading penny stocks, you need to reframe your investment mentality and recognize that the penny stocks trade market is not like a traditional major stock exchange.

There are different rules to penny stock trading and dramatically different approaches. While traditional stock trading methods will not work, you can learn how to successfully trade penny stocks and make a reasonable amount of profit in the process.

This story covers what penny stocks are, how they trade, and ways you can maximize your chances of success in pursuit of these volatile investments.

What Is a Penny Stock?

Once upon a time, penny stocks traded for pennies on the dollar. Today, some die-hard investors still maintain they are stocks that trade for less than $1 per share. However, the U.S. Securities and Exchange Commission (SEC) has since revised the definition to include any stock priced under $5 per share.

The vast majority of penny stocks originate from untested small companies that don’t have any past performance to accurately judge their performance on the market. As a result, most penny stocks are traded over-the-counter (OTC) on either the OTC Markets Group or OTC Bulletin Board.

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Still, it’s possible to see stocks listed on a major exchange such as NASDAQ or the NYSE if they have enough shareholder equity, a certain number of public float shares, and high enough total assets, among other requirements.

How Penny Stocks Work

]rading penny stocks is very different from buying and selling on major exchanges. Most trading strategies on Wall Street are based on playing the long game or looking for small companies poised to take off. 

Ideally, penny stocks trading works best when you identify a positive market trend, purchase shares quickly, and then sell penny stocks before the value dumps again. This is one reason why penny stocks are considered risky investments, as trading strategies are almost always short-term.

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