A penny stock typically refers to the stock of a small company that trades for less than $5 per share. Typically, penny stocks are the shares of troubled companies with very small market capitalizations that are not listed on major stock exchanges. Here are the ways how to buy penny stocks:
How to Buy Penny Stock
If you’re dead-set on buying penny stocks, even after understanding all the risks involved, as Forbes states here’s how to position yourself for maximum gains and minimize losses.
- Decide how much you can lose. Yes, penny stocks are that volatile—occasionally spoken in the same breath as cryptocurrency. Set aside an amount and avoid putting the bulk of your savings into these unpredictable holdings.
- Stick to major exchanges. “There are plenty of stocks that trade between $1-$5 per share. Those can be found on the big exchanges like the NYSE or NASDAQ,” says Hardt. “This greatly reduces your odds of unknowingly stumbling into a fraud. The liquidity offered on these main exchanges is also much better than the OTC market. In addition, you’ll probably be able to buy shares using a traditional brokerage instead of using OTC methods, which should make trading even easier.
- Do your research. While reliable information might be more difficult to find on many penny stocks, you can look to companies traded on major exchanges that have recently fallen below the $5 threshold. Professional traders like
- Hardt refers to these as fallen angels. They may be in industries experiencing cyclical downturns and otherwise be good companies that have stumbled on bad times.
- Be conservative with fees. If you’re going to invest in penny stocks, look for platforms that let you do so without hefty fees and commissions. Due to the low prices of penny stocks, you don’t want to be paying more in fees than you could easily earn back from investing.
The Bottom Line on Penny Stock
Penny stocks are risky and there’s not a lot of information available on most stocks that trade over the counter. With so many alternatives to penny stocks that allow investors to start investing with $5 or less and still enjoy solid historical returns, there’s really no reason to see penny stocks as a wise investment.
If you still doubt, though, consider Simpson’s parting words. “If you are considering investing in penny stocks, you would be better off taking that money to the casino and enjoying yourself while you lose your money,” he says. “Invest smarter. There are low-priced alternatives to penny stocks that will allow you to start investing, without having a large sum of money.”
While you may not double your money overnight with choices like index funds or ETFs. Base on historic returns, you would about every seven years and see steady.
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