Penny Stocks Trading

Penny stocks are traded by novices as well as professionals. Some traders use penny stocks as a tool to learn trading, while others are more adept at making money in this market. Penny Stocks are cheap, and that is why they are called penny stocks, although not always costing a penny most penny stocks range in price from $5.00 to .0001.

Most investments into penny stocks turn into losses. There are many reasons for this, a main reason is that the company shares very little information

with the public while doing almost anything to keep their operation afloat. They might have a great idea but lack in funding, therefore they dilute their shares looking to raise capital in that manner.

Trading penny stocks is more appealing than investing and also more successful. When trading a penny stock your only concern is to buy low and sell higher. You can ride the business cycle and news output of a company and make money even if they’re not ever successful.

All that being said, companies have to start somewhere and there are plenty of success stories. Where companies began as penny stocks, worked their way up the system becoming successful companies who begin trading on the major exchanges as non otcbb stocks. Mostly though the penny stock ranks are for companies who fail and “penny stock scams”.

Penny stock scams come in many forms. The more common scams are companies who promote themselves using news releases and promotions to drive up the price of the stocks and then they dilute their shares into the volume. This way as their selling new shares into the float, the price doesn’t drop giving them maximum price for their diluted shares. To complete this scam the companies will usually allow interest in the stock to slow down a bit and then they will file to reverse merger. Which just means they cut down the amount of shares in the float. In larger companies this is a good thing but with penny stocks this just starts the process of dilution all over again. You can see where the incentive to make profits in this manner appears when a company just isn’t making it.

Another big scam is the “pump and dump”, this scam and penny stocks are synonymous with one another, this scam comes in many variations even in the aforementioned scam. Basically shares of the stock are held tight by a few. The price is driven higher and higher through “pumps” fake press releases, message board chatter, and promotions through various websites. Once this stock gains greater value, the shares held tightly are “dumped” into the open market leaving shareholders who bought the hype with a drastic loss.

Penny stocks are a great way to begin dipping you feet into the trading world. Traders who enter this market will take some losses but there will also be huge gains. There is nothing like buying a penny stock based on your due diligence and watching it skyrocket to hundreds and sometimes thousands of percent of the price you paid. This may sound unusual, but it isn’t, in fact this happens all the time in the penny stock market. Anything that goes up thousands of percent, will also come down that much and maybe more, making the timing of your purchase even more important. What can be one persons incredible gain can also cost another person

A Primer on Penny Stocks

If you have been considering whether or not to buy penny stocks, it would be advisable to do a reasonable amount of research before "jumping in with both feet", so to speak. The world of penny stocks has often been glamorized by various investment advisory services as well as so-called "stock gurus", but in reality you have to approach investing in penny stocks with a sober-minded attitude as well as a degree of caution and level-headedness. While it is true that extravagant profits can be made in the penny stock arena, it's also true that there are more losers than winners, mainly because many people jump into the markets prematurely, blinded by the allure of quick wealth with a relatively small up-front investment. It would behoove any would-be penny stock investor to do his or her homework before committing their hard-earned money. That being said, hopefully this article will give you a better overall understanding of the penny stock arena and why they are a viable investment if used in the right manner.

What is a Penny Stock?

The most widely accepted definition of a penny stock is any publicly-traded company whose stock trades at $5.00 per share or less. Some have argued that the share price should be $1.00 or less to be considered a true penny stock, but for the purposes of keeping things simple, we will keep the $5.00-or-under definition. Most publicly-traded penny stocks are traded on the Over the Counter Bulletin Board Exchange (also known as OTC-BB), or on the "Pink Sheets" (somewhat of the "Wild West" of the stock market). These companies are usually valued as having less than $4 million in net tangible assets, and are normally companies that don't have any type of extensive history. This would by default include many start-up companies and "one-man shows". Penny stocks are also known as "micro-cap stocks" due to their relatively miniscule share value.

The Potential of Penny Stocks: The Power of Leverage

The power of a penny stock is the fact that the shares are normally priced so low that there is an incredible amount of leverage available to the investor that isn't often seen in the "blue chip" stocks, such as Google, IBM, or FedEx. Think about it: The average "blue chip" company can trade in the neighborhood of hundreds of dollars per share, which means that the stock would have to make tremendous advances in order to double. Conversely, a penny stock that's trading at literally pennies per share can double rather quickly, thereby doubling whatever initial investment you put into the purchase of those shares. As an example, it would be much easier for a stock trading at 10 cents per share to double to 20 cents per share (a 100% return), while a "blue chip" stock trading at $300.00 per share would have to do some serious "financial gymnastics" to double to $600.00 per share. Again, the return would be the same (100%), but the likelihood of the penny stock doubling is much higher than the "blue chip" ever doubling due to the hefty price per share of the "blue chip".

Leverage is a Two-Edged Sword

Although there are some fantastic opportunities that exist in the penny stock arena due to the power of leverage, the potential for loss is also greater. A slight fluctuation in the price of a "blue chip" stock may only mean a 1% or 2% drop in your investment, while that same proportionate fluctuation in a penny stock is much more violent, generating potential losses of 50% or more. This volatility factor is the primary reason that penny stocks have often been labeled as "risky".

Invest Wisely

The most reasonable way to approach a potential investment in a penny stock is to go into the trade knowing that you could possibly lose your entire investment. If you can live with yourself in light of that knowledge, then you may be ready to handle the ups and downs of the volatile world of penny stocks. If you're not ready to completely part with your funds, and any loss of your initial capital would cause a major financial crisis, it would be advisable for you to stay out of the markets. The old adage is true, "Never risk more than you're willing to lose". This holds true especially in the arena of penny stock trading. You must be willing to approach the markets with a sense of balance and patience so that you can execute a trading plan based on sound principles, and not on hype.

Understanding Penny Stocks

As the name suggests, penny stocks are stocks that are extremely cheap - usually priced less than $5 a share. These are most commonly all from small companies. These stocks are traded on the Over-The-Counter-Bulletin-Board (OTCBB) and the Pink Sheets. Both these trading venues do not have the same kind of minimum requirements of exchanges such as Nasdaq or the NYSE set by the Securities and Exchange Commission. Companies that issue penny stocks may be new businesses or close to bankruptcy. So beware when you are investing in such stocks - keep in mind that some of these companies are startups and others are near bankruptcy.

1. A Bad Investment

In fact, the low price may be the only thing that penny stocks have going for them. A lack of standards and stability make penny stocks one of the riskiest investments around. It is true that if a company succeeds the payoff will be great, but the vast majority of penny stocks end in utter failure.

2. Lack Of Company Information

Companies listed in the Pink Sheets or the OTCBB do not have to issue financial statements. Most companies also have little reportable history that is known. You certainly will never have heard about any of these companies, nor will they be likely to have ever been featured on the news.

3. Low Liquidity

Very infrequently traded, finding a buyer once you invest can be a real hair puller. You may have to lower your price a lot in order to get people interested enough to take the stock off your hands.

4. Fraud

Because they are completely unregulated, penny stocks are commonly used by con artists who sell them through spam emails or off-shore brokerages that don't have to adhere to laws because they operate in international waters.

5. Why On Earth Choose Penny Stocks?

All of this doom and gloom might have you wondering why you should consider penny stocks at all! Well, first of all, not all penny stocks are frauds or companies facing bankruptcy. Some represent hard-working businesses that are struggling to meet the requirements to get listed on Nasdaq or the NYSE. Investing in these companies offers real growth potential – you have the opportunity to get in at the ground floor and ride all the way to the top. The difficulty is finding that companies have this growth potential. Getting this information requires a lot of research and unless you are willing to take the time to personally investigate a company, you may as well throw in the towel.

When To Sell Penny Stocks

Penny Stocks can be a very effective way to provide you with a secondary income. They can be used to create passive income because they do not require you to be constantly watching over them. The problem that most people have when it comes to stocks is - not knowing the right time to sell.

Penny Stocks can rise very quickly but they can also fall quickly too. The reason that most investors hold onto a stock is because the fail to separate their emotions from their actions.

All of your penny stocks buying and selling should, of course, be based on sound research both of the market and the companies’ recent history. How the company is doing in terms of profitability, whether they are just about to, or have just announced profits, losses or new patents, discoveries and products, can all affect your decision on whether, or not, to buy.

Knowing the right time to sell your penny stocks however can sometimes seem, as much an art as a science, although getting it wrong can be fatal. Many people seem to put all their research efforts into knowing what penny stocks to buy and when to buy them.

Investors seem to forget about researching to sell stocks. Instead, they let their emotions take control and sell at the wrong time. Investors selling at the “wrong time” fall into two categories. These categories are, The Runners and The Sitters.

The Runners like to take profit way too early. They see their Penny Stocks rise a little and sell because they don’t want to “risk too much”. I’ve seen it time and time again; these people set out to earn a 25% Return on Investment and end up taking profit at 1%. Someone who takes profit twice at 25% earns a lot more than someone who takes profit twice at 1%. Usually, as soon as they sell a penny stock, it will rise even further and they’ll be wondering why they sold so early.

The Sitters are the heavily emotionally involved in their penny stocks. They are gamblers at heart and just do not want to let go of a losing position because “it could bounce back any day now”. When they do let go of their Penny Stocks - there is virtually nothing left. The sitters like to sit on a losing position. They like buying but dislike selling.

Do you want to be a Runner or a Sitter? Well, I hope you are neither. You want to be a winner. A winner will separate their emotions from their investment thinking and will also research when buying and also when selling. They will buy and they are not afraid of selling.

There is great deal of profit to be made from trading in Penny Stocks. But you have to know not only what to buy but also how long to keep it and when the best time to sell. The answer, as with most things in the world of finance, is good information and research. But that doesn’t end when you buy. Find out why your penny stocks are rising and this will put you in a much better position to know when to sell.

8 Penny Stocks To Avoid

There are many good penny stock investments available, which could turn a small amount of capital into a small fortune very quickly. However, to discover these you need to know what to look for and what to avoid. When searching for that one big payoff, steer clear of the following examples.

The Phone Salesman - Anyone who is attempting to sell you investments over the phone should be considered an enemy. They have high-pressure sales tactics, and effective, believable arguments. However, they are not doing you any favors, no matter how good they make an investment sound.

They are operating in their best interest to dump over-the-counter stock on you, and the money you pay in will go into their own pockets, or the pockets of their company.

There has never been a need for good companies that are going places to resort to these type of tactics, but there has always been a need for poor, sinking, or shady companies to do so. If you choose to ignore this advice you deserve what happens to your investment.

You may also run into difficulty trying to find a buyer for your shares once you decide it is time to sell.

Very Low Volume Stocks - Without much trading activity it becomes increasingly difficult to buy or sell for the prices you want. As well, it becomes nearly impossible to get an understanding of where the stock price is heading, or to calculate fair valuations for the company’s stock price.

Not only that, but companies subject to low trading volume generally do not have a lot of positive interest.

The Hot Tip Stock - There are actually professional promoters who make a very good living generating and nurturing rumors about some penny stock that’s guaranteed to go through the roof. The entire concept hinges on the rumor being spread from person to person, at the office, over the phone, or at social venues.

The promotional ploys can be very costly for investors who get involved without special knowledge about the company or the actions of the promoter. In most cases if a stock really is going through the roof you won’t hear a word about it, because a select few individuals will be very intent on keeping the information to themselves.

Guaranteed Performance - If a stock is guaranteed to go up, it will almost always go down. Nothing is ever certain, especially on the stock market. When someone guarantees certain performance out of a stock, they may be a promoter, naive investor, self-serving broker, or have heard the guarantee from another source. In any case, don't believe them. Instead check into the company yourself and if you feel it is a good investment, you may want to proceed.

Sinking Ships - When a stock has dropped a lot you may think that, "it can’t go any lower," or that it is "a good bargain." Especially with penny stocks, you need to avoid this type of thinking because many sinking ships don’t ever rebound, and they can go lower, and they aren’t good bargains just because they cost less than before.

Commission Free - If you are interested in getting stock commission free you may think you are saving money, but it generally means that you are buying over the counter stock directly from a promoter or the company.

Either way, they take their own invisible ‘commission’ from you, either by selling to you for an arbitrary amount which is unfairly high, or selling to you for the asking price rather than the bid price based on their own current valuations.

International Penny Stock - We’re not talking about living in the U.S. and steering clear of Canadian stock, or vice versa. We are talking about penny stock issues from Africa, Australia, European, Russian, or South American penny stock markets. First of all, you won’t be too impressed with the level of investor protection and exchange honesty in some of these regions, and you most certainly won’t be too impressed with the broker fees you incur when trying to purchase internationally.

Besides, if you can’t find good penny stock investments in North America, you won’t be able to find them anywhere else either.

Warrants and Rights - These are not technically stocks, but instead are derivative investments based on an underlying company's shares. However, they often appear like penny stocks because they sometimes get listed in the stock pages, and often trade for pennies.

It is unlikely that you will accidentally purchase derivatives, but make sure you know what you are trying to buy by understanding the listing criteria of the paper you are reading, or verifying your purchase with your broker.

To get free information about investing in penny stocks visit http://www.pennystocks.com They offer information on the definition of penny stocks, getting started, benefits, risks and how to find a good penny stock.

Buy Penny Stocks?

This question is not an easy one to answer. The answer depends on many variables. We'll start with who should not buy penny stocks. You should not buy penny stocks to invest in the college education of your children. It's a bad idea if the sole investment in your retirement portfolio is penny stocks. Having one or 2 penny stocks in a large retirement portfolio is great. But who wants to retire with a penny stock, if your luck that early buy will be trading on the nasdaq. Normally though, penny stocks are bought to be sold quickly for profit.

Largely people do not buy penny stocks for the long term profit of the company. Rarely does one of these low priced companies become a profitable one that trades on the major exchanges. The majority of these companies fail and even more fail their investors. Those who trade penny stock often realize that there are many companies that are not telling the truth in their filings or their press releases. Weeding through the scam companies and constant dilution is the job of a penny trader.

This is not to say all penny stocks are bad, there are many companies really trying to blossom into great investments. A majority, although they're bad investments, are great to trade during the ups and downs of the stock cycle. Most penny stock traders learn how to read charts to gain the most profit out of these cycles. You must be able to buy low and sell high in the otcbb market.

Remember, when you buy penny stocks, you're making a trade. Know what you expect to happened with the stock price or based on news within the company. If you get the profit you were hoping for, don't forget to sell. You must plan your trade. Also, if the stock fails to live up to your expectations, sell immediately. You don't want to hope it will bounce back penny stocks can keep going lower and lower into sub penny territory. Its very easy to throw a few thousand dollars on a running penny stock only to see it turn to the downside quickly, every second you wait is hundreds of dollars. Of course then you begin to think, where's the bounce? If you wait to long, that account will be empty.

Traders buy penny stocks for the profit. Whether it's a long term profit or a short term one. Usually its short term because penny stocks run so fast and straight up. If you hold on your just being greedy. Sometimes that greediness works out for the best. Don't buy penny stocks if you don't know what to expect or how to get out. You must trade with a plan. There are other articles here discussing what is a good entry price and when stocks are at their bottoms. Please read these articles and others before you buy penny stocks for the first time. Did I mention plan your trade.

Penny Stocks

Penny stocks are usually not listed at the major stock exchanges like the New York Stock Exchange (NYSE) or the NASDAQ because they don't meet the listing requirements. Listed stocks must have a minimum number of shareholders, minimum assets and file financial reports regularly. They are also under the strong supervision of the SEC, the Securities and Exchange Commission.

Penny stocks are usually traded on the OTCBB or on the Pink Sheets. The OTCBB (OTC Bulletin Board) is an electronic quotation system for over-the-counter securities that are not listed with one of the national stock exchanges. The only requirement is that the companies file financial reports to the SEC. If not, the company is removed from the OTCBB listing and the stock can only be quoted on the Pink Sheets. The Pink Sheets activities are not supervised or regulated by the SEC.

If the company has less than $10 million in total assets or less than 500 shareholders in total then no filings must be done at all.

Penny stocks are for these reasons wide open to scams and manipulation. The stock price is usually far below $5 and market capitalization is very small as the companies itself are very small. The lack of reporting requirements can make it difficult to find verified information about the company, its financial situation and outlook.

Many fraudsters take advantage of this and publish misleading information to manipulate the stock price. Because of the lack of public interest and low number of shareholders the trading volume is generally low. This means that a few buy or sell orders can have dramatic effect on the share price.

The low liquidity is at the same time the biggest advantage of penny or micro-cap stocks. While a listed stock can almost never move several hundred percent within a few days, a penny stock can do that easily. The low share price makes it possible to acquire a big amount of shares with a small amount of money. Little price increases or decreases have therefore big impact on the performance.

The low stock prices and limited capital requirements often attract novice traders but penny stocks are definitely a playing field for experienced investors only. Penny stocks are high risk investments. Many companies won't probably succeed and go bankrupt. The shares will end up worthless.

Many penny stock companies have no or very limited working capital, assets or are in development stage for months or years before any revenues can be expected. Be aware that you probably can't sell your shares for days or weeks or only at a big discount because of the limited liquidity.

One A Penny, Two A Penny, Hot Penny Stocks...

The peddlers of hot penny stocks today peddle their wares much like the hot cross bun streetsellers of the 19th. Century. They don't exactly hawk their wares round the shopping malls crying out “Get your hot penny stocks tips here”, but telemarketers and professional rumor mongers are making sure that you get their message loud and clear. The message is the same – buy my stock – it's just the medium that's different. The telephone, newsletters, the internet and word-of-mouth are the vehicles used to ensure the message is heard.

The old streetsellers were certainly streetwise; two a penny buns were seen as bargains to be snapped up before they went cold. Bought too many? The nursery rhyme offers a solution: “If your daughters do not like them, give them to your sons”. Buy two a penny hot penny stocks and that's what you are likely to be doing, too: giving them away because they'll be almost worthless. Two a penny hot penny stocks sell like hot cakes only because the hot stock tip comes from unscrupulous promoters eager to spread the word that the stock is about to go through the roof. You won't make a killing, but the promoters who pocket your money will.

Let's pause for a moment and reflect on why anyone would want to go around circulating these rumors or peddling 'hot penny stocks' over the 'phone. It just doesn't tally with human nature nor with the way in which power operates in the real world. Just think about it: isn't it far more likely that a small number of self-interested individuals are intent on dumping over-the-counter stocks onto you? Why, if they had genuine information on a hot penny stock about to take off, would they want to share it with you?

It's perhaps a truism to say that knowledge = power = money, but in the real world it's also true that individuals who wield the most influence and power, and incidentally tend to make the most money, operate quietly behind the scenes. That's not to say that these background figures, who buy and sell stocks over the counter, necessarily operate “under the counter”. Nor is it true that there's no such thing as a good, informative penny stock newsletter. However, it does mean that, when being harangued by a zealous telemarketer to part with your money, you can be sure that a sinking company and a few unscrupulous individuals are lurking in the background.

Perhaps, though, you see two a penny stocks as providing a real opportunity to get in at the bottom and then make a big killing? Perhaps, when a stock has dropped, you might think that the only way to go is up? Don't get fooled, though, into buying “bargain” stocks solely because they cost less than before. They could continue to sink without trace. As children we must have been extraordinarily prescient when we added an extra line to the nursery rhyme and chanted the virtues of four-a-penny bargains: “If you haven't got a halfpenny, a farthing will do”. It won't do, though, if you're buying hot penny stocks. Don't ever feel pressured into buying a “bargain” that will almost certainly end up virtually worthless.

If you still think that you're acting rationally in buying hot penny stocks then you're behaving exactly as our 21st. century streetsellers would wish. But, remember, you're not a consumer buying hot cross buns: you're an investor aiming to make money by buying and selling hot penny stocks. Buying two-a-penny hot cross buns might make some sense, but two-a-penny hot penny stocks can mean buying, but not selling, for the price you want.

Not only selling but buying, too, becomes difficult when stocks are being traded at very low volumes but, at the same time, are being flagged up as the next hot penny stocks tip. A consistently high volume of traded stocks is absolutely essential, preferably on a daily basis. Average figures might seem good enough, but can often mask one insider's buying and selling activities. Lack of trading opportunities precludes any chance you might have of becoming a rational, educated trader as you will not develop a “feel” for where the stock is heading.

Learning how to become a rational, educated investor takes time. There's no easy shortcut to the undoubted profits which exist in the market. Those individuals who want to reduce the risk of their hot penny stocks investment must be proactive and subscribe to a newsletter, research companies, and track investments.

Only when they feel comfortable, and have set themselves a limit of 20% of their portfolio to invest in hot penny stocks, should they prepare to do quiet battle with the market and silence the two-a-penny hot cross bun merchants.

What Are Penny Stocks and Should I be Trading Penny Stocks

In the world of financial services there are lots of shades of gray, actually green. Some items are clear and have a simple definition, while others defy being pigeon holed. Penny stocks are one of those very concepts. There is no accepted, official designation for the term "penny stocks" and which are and which are not will depend on exactly whom you ask. The SEC calls any stock under $5 a share a penny stock. Each brokerage firm and financial entity will have a different set of criteria for deciding whether or not a stock is "penny stock" or not.

In the easiest of terms, penny stocks are usually determined by three factors. These factors are (1) the price per share, (2) the market that the stock trades upon and (3) the market capitalization of the company from which the stock derives. Of course, there are some variations on each of these factors, and some brokerage firms will treat all stock from companies under a certain market cap as penny stock.

The Securities Exchange Commission will consider all stocks with a price per share of less than five dollars a penny stock; brokerage firms usually are far more lenient. Having one factor to qualify as a penny stock will not necessarily give a stock that determination, most have at least two and many qualify under all three.

Penny stocks are high risk, but can yield high rewards if you carefully research these investments. Make sure that you understand that it is easy to lose all of the money you have invested, but it is equally easy to make fast money with some smart planning and a lot of good fortune. Some brokers will not deal with penny stocks because they can be considered volatile and wildly unpredictable. They are usually unable or unwilling to do the necessary background research for these un-proven, small company-based stocks, and in many cases may consider them beneath them.

A small market cap usually relates to a small business, which unfortunately in this economic crisis period has a higher rate of total business failure. Although probably not a good idea for the beginning trader, or those with already tight budgets, penny stocks can be profitable in the right hands. Because they are usually from smaller and largely unproven companies, they can be purchased at bargain prices. If the company does suddenly have a growth surge, not only have you gotten in under the huge price increase, you have just made a large profit. Finding these profitable companies is the hard part. There are thousands of Penny Stocks to choose from, but how do you know which ones will become profitable. Just recently a company has developed a computer program that uses artificial intelligence to sift through the millions of pieces of data. So far the results have been phenomenal. They call it the Stock Trading Robot and it is the 1st commercially available stock trading robot of its kind. Check it out for yourself at the link below, just be very diligent and do your homework.

Buying Penny Stocks

Investing in penny stocks is often seen as a cheaper alternative to buying regularly traded stock. While it’s true that it’s easier to enter this market, this doesn’t mean that the risk is lower, to the contrary, penny stocks are considered quite volatile.

A penny stock is also known as a microcap (or nano) stock which normally trades for under $5 per share. These smaller stocks are often offered by upstart and struggling companies as a way to obtain quick cash flow for their business. This is not Coca Cola or Microsoft you’re investing in. These companies have not yet proved they are stable enough to stick around for the long haul.

Because of their low cost, you may be tempted to invest in several microcap stocks that look like a good bet. Keep in mind that you cannot just randomly pick a winning stock by your gut feeling. Just like with larger stocks, penny stock investing requires lots of research on the investor side, before putting down any money.

Online, there are several companies that provide stock analysis and lists of their current picks that are formulated according current market trends. It is almost impossible for the average person who has a full-time job to do proper stock analysis by themselves. The speculative nature of small cap stocks is somewhat like riding a roller coaster. Companies you invest in will have their ups and downs.

While you can try winging it yourself, you’ll have better success if you use expert analysis that shows you what are the most promising picks, and whether or not you should keep the stock you already own or sell. Knowing when to buy and when to sell are the key ingredients of successful stock trading. This is especially true when it comes to smaller stocks.

Because these stocks are so much cheaper to buy, you could typically buy 1,000 shares of stock at fifty cents per share for a cool $500. Indeed, this is a lot of shares and if your pick is a good one, you’ll make a pretty profit. However, if it’s a bad one, you’ll lose all of your money. Therefore, choosing the right stock analysis system is really important.

No matter which stock system you choose, you should still plan on losing money, because no system is 100% accurate all of the time. There are just too many variables that can happen to a company that will be completely unpredictable. Being a successful investor, means you want to have more winners than losers.

Every successful investor also knows not to put all of their money into one stock. You will need to spread out your risk. This means investing minimal amounts of money in several stocks and watching them carefully. A wise investor will narrow their picks down to companies that offer the least risk. Finding these companies will take time and patience.

If you are new to penny stock trading, you will find it extremely beneficial to do paper trading before jumping into the market with real money. You can learn how to use a trading system by making fake trades based on real data, and then keeping score of how well you do. Paper trading is a great way to know whether a particular system is right for you without risking any money.

Once you know what to look for in a small cap company, it’s very possible to earn a nice living investing in the future of small businesses. Make sure that you have reliable resources and training tools by your side so that you have the best possible chance at making substantial profits.

Penny Stocks Buying Selling

The world of penny stock day trading is often compared to gambling.

Why?

Because when you win, you win big. If you lose, you can lose a whole bunch of money. The speculative nature of penny stocks or microcap trading is well known. Companies that offer cheap stock are not the same companies you’ll find in the blue chip market. On the contrary, they are often very risky investments.

The reason why their stock is so cheap is because they are just starting out in business or they have mismanaged their business and need a quick bail out. Selling inexpensive stock is a way to raise some fast cash for their enterprise.

Determining which small cap stocks are a good buy is very difficult and not for amateur investors. The truth is, most microcap stocks are pure junk. It’s really common for a novice investor to lose money after being lured into buying a cheap stock that is supposed to make them rich.

Very often, these sure deals are nothing but scams that are designed to make the insider stock picking services big money. They count on your lack of experience and knowledge to make them rich.

Only about 5% of the small cap market is truly worth investing in – the rest should be tossed aside like yesterday’s garbage.

The good news is that with the right information and guidance, you can make really great profits in this market. Most smart investors will sign up for a newsletter that specializes in penny stock picks. The reputable newsletters will only analyze the top 5% of companies that they feel are worth putting money on. They will usually recommend three to five good picks. You then decide whether you want to go with their picks or not.

Another reason why it’s a good idea to go with a newsletter is that you can greatly minimize your risk. Wise investing is all about picking more winners than losers and not putting all your eggs into one basket.

Since you probably have a full-time job, you don’t have time to spend pouring over endless data about thousands of companies out there offering cheap stock. You definitely need experts to do this for you, and you also need the tools to make your investment decisions easier.

Many people get into day trading penny stocks for the thrill of making big money in a short amount of time. While this is totally possible, you must also temper your enthusiasm a bit in order to make good decisions based on factual information.

Here’s an example of a typical microcap stock trade:

Let’s say you find a start up company that’s in the software business. They create medical software for hospitals. This sounds like a pretty good business to you so you take a look at their stock offering.

You see that they are selling shares at 50 cents a piece. So, you decide to buy 500 shares for $250. You sit on the stock for a while then you see that it starts to go up. It peaks at $3 per share and you decide to sell. You’ve just made a nice $1,250 profit from that one stock. That’s a 600% rate of return!

This kind of profit is what excites most people about small cap stocks, however, if the opposite should happen and that stock goes down by even inches, you’ll lose all of your initial investment money. This is why you should never invest money that you need to pay your bills and buy food.

Only invest extra money that you can spare. It’s similar to if you were going to Las Vegas for a vacation and you budgeted a certain amount of money to spend on gambling at the casinos. If you lose it, no sweat - it’s fun money anyways.

Day trading penny stocks can be looked at in the same way. It’s fun and profitable when you win, but not so much when you lose. Unfortunately, many investors gamble with money they shouldn’t be risking and lose it all with one or two bad trades. I know this isn’t going to happen to you because you’re going to learn how to invest the smart way, and in this topsy turvy market, that’s the only way you’ll end up being a winner.