Lesson 1: About Penny Stocks

Before trading penny stocks, it is important to understand what penny stocks are and how they typically trade.

Penny stocks are stocks that trade for less than $1.00 per share. In most cases, penny stocks trade on stock quotation systems, such as the Over The Counter Bulletin Board (otcbb.com) and OTC Markets (otcmarkets.com), which is still referred to by its historical “Pink Sheets” name that preceded the Internet era.

Penny stocks typically trade on news and momentum, and can make dramatic moves higher or lower in a given trading day. Traders who trade penny stocks have to become accustomed to trading large blocks of shares to make a profit, since penny stocks trade at such low prices, in some cases even below one penny. Penny stock traders often have to make quick trading decisions regarding when to buy and sell penny stocks, since the stocks tend to move quickly.

Like all other stocks, penny stocks rise and fall based on supply and demand. The more buyers bidding for shares of a penny stock, the higher the price goes. When the sellers outnumber the buyers, a penny stock will fall in price. What makes penny stocks different than big board listed stocks is that they can move extremely rapidly when sudden buying or selling pressure hits penny stocks. They can also be subject to large amounts of dilution by company insiders, which can cause a sustained drop in the price of penny stock shares, causing substantial losses for those holding shares long. To protect a penny stock trading account, it is crucial to have a solid penny stock trading strategy in place.

What is enticing about penny stocks to traders is their ability to make substantial gains in short amount of time, sometimes in as little as a few hours within a trading day. It is not uncommon for penny stocks to increase in price by hundreds and even thousands of percent in a matter of hours or days. Read on to learn about the tools and strategies that will make you a successful penny stock trader.

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