An Introduction To Trading Penny Stocks

by : Jeff Goodman

What Are Penny Stocks?
The term penny stock refers to any stock that is traded outside one of the major exchanges. Some say any stock under two dollars, some say under five dollars. I call a penny stock any stock that trades under one dollar.

  • A sub-penny stock is any stock that trades under one penny. (.001-.01)
  • A sub-sub penny stock or super sub are those stocks trading in the .0001-.0009 range or hundredth of one penny.

Exchanges to Trade Penny Stocks
There are different exchanges that penny stocks trade on.

  • The OTC Bulletin (OTC-BB)
  • Over the counter (OTC) 
  • There is TSE and TSE Venture Exchanges in Canada.
  • Pink sheets markets here in the USA.

What Are Pink Sheets?

When a company isn't listed, it often will trade on the Pink Sheets or the Over the Counter Bulletin Board (OTCBB). A stock that doesn't trade on a major exchange is said to trade over the counter (OTC). This means that the stock is dealt between individuals connected by telephone and computer networks. In short Pink Sheets are stocks that has the most risk with no reporting requirements.

Why Do People Trade in Penny Stocks?
These risky, pink sheet stocks give you incredible leverage. Most if not all of the super subs are pink sheets. The super subs give you the most bang for your buck. I look at it this way, the leverage you get with the super subs makes up for them being more risky. I would not call it investing with pink sheets, actually it is speculation. With short term penny stock trading, it's all timing. You can make money buying the worst companies at the right time and money can be lost buying even the best companies at the wrong time. Actually I need to say buying and SELLING at the right time will make you money. I've heard it said that 80% of a successful trade is in selling at the right time.

Penny Stocks Can Make You Wealthy
Penny stocks can make you very wealthy in one to three years if you learn how the game is played. You may have heard investing in penny stocks is risky.? Yes, it is risky, High risk/high reward. Do not trade with money that will destroy you if you loose it.

So why do it if it is risky?
The number one reason is leverage. It is simple math. Because the price is so low you can buy millions, hundreds of millions, even billions of shares. At the lowest price of .0001 you can buy a million shares for $100.00 and hundred million shares for $10,000.00. If the price goes to one penny you have made one hundred times your money. Your $100.00 is now $10,000.00 and your $10,000.00 is now $1,000.000.00. Yes now you have one million dollars. Does this happen? Yes it does! Huge moves like that don't happen every day. When a stock goes up to ten times your money it is called a ten bagger, five times a five bagger. Ten thousand dollars put into a ten bagger is one hundred thousand dollars put that into another ten bagger and you have a million dollars. If you don't have ten thousand to start out you would still have a million starting with one thousand dollars if you had three ten baggers instead of two in the previous example

This is not to say you can't loose money.
You can! These are just examples to open your mind to the power of super leverage. The beauty of trading penny stocks is you can work from home or from anywhere that has a internet connection.

It is Easy to Start
All you need is a computer, a internet connection, a on-line broker and some money to start.

How much do you need to start?
It depends on your situation. It is best to start small until you have gained some experience.The people that I see that make the really big money in penny stocks have a considerable amount of money that they are trading with. The old saying, 'it takes money to make money' is true. It is all about liquidity. These stocks are so volatile the only way to play them is trade them. When you start with a small amount of money in your trading account, it is very easy to get wiped out to nothing. It's happened to me more times then I want to admit. After getting wiped out but seeing that penny stocks have the very real potential of making millions I started looking for a way to generate a large amount of money to trade with.