A penny stock typically trades outside of the major market exchanges at a relatively low price and has a small market capitalization. These stocks are generally considered highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They often trade over-the-counter through the OTC Bulletin Board (OTCBB) and pink sheets.
Penny stocks are really the black sheep of Wall Street. We've all seen them from the Wolf of Wall Street movie to almost every other video that populates YouTube.
They're attractive for one reason: They're cheap. Now of course trading them can be profitable and if that's your schtick then keep at it - after all making money trading anything can be hard. But if you're just learning how to trade penny stocks then we have a mini-lesson and insight that might help you.
It's called the synthetic call option trade.
Where most penny stock traders tend to get it wrong, in our opinion, is they get in and out of positions too much. But again, if you're making money don't change it, we just think there's a way to slice the bread a little differently. The idea of a synthetic call option trade is to find a cheap stock or a penny stock and buy the shares and hold them.
Just because you don't hear about penny stocks every day on CNBC doesn't mean that penny stocks are without drama. Unfortunately, penny stocks have also garnered a reputation as a game filled with scams and corruption. Indeed, penny stocks could be your wildest ride yet as an investor.
So then, if penny stocks usually aren't traded on normal exchanges, where can you buy them?
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How to Buy Penny Stocks
Like any other stock you would buy, you can purchase shares of a penny stock through your normal stockbroker -- regardless of whether or not it's listed on a major exchange.
While cheap stocks listed on exchanges like NYSE and NASDAQ aren't typically considered "penny stocks" per se, they can afford a lot of the benefits of penny stocks without quite so much risk. These exchanges have strict listing requirements, and while they might not allow for as much of an upside as "true" penny stocks can, they tend to be more reliable. More often, though, penny stocks trade on listing services like OTCBB and Pink Sheets.
Over-the-Counter Bulletin Board, or OTCBB, is a quotation. Unlike Pink Sheets, which is just a quotation publisher, OTCBB maintains listing requirements (though they're less stringent than those of an exchange). For this reason, OTCBB has a little bit of added legitimacy.
Pink Sheets is a system that provides investors with quotation information on stocks that are registered with it. Unlike OTCBB, however, Pink Sheets isn't registered with the SEC and doesn't enforce any listing requirements. Bottom Line: Pink Sheets stocks are risky.
Unlike options where there is a time expiration the shares never expire, unless the company goes bankrupt. So recently an opportunity presented itself with Sears Holdings (SHLD). Now where this is a penny stock or not is debatable but it's trading at less than $5 a share which our world is a penny stock.
Fact: Penny stocks are inherently risky. Fact: Penny stocks can be fodder for scammers. Fact: Penny stocks can make you a lot of money.
Even with all the risks and drawbacks involved in penny stocks, many investors simply find that the potential windfalls are well worth it. There's a reason that penny stocks remain popular among a brave clique of investors: Penny stocks can deliver a very impressive return. Hopefully, you'll find that your new penny stock know-how makes the Wild West of investing a little more tamable.
So while we made a trade on a penny stock above it's more of a longer term trade. So if you're learning how to trade penny stocks it's a good idea to consider the risk involved and to handle it logically.