• Home
  • About
  • Advertise
  • Contact
  • Policy
  • Guest Post
  • Archive

One Cent At A Time

A Personal finance blog to get rich

  • Email
  • Facebook
  • Pinterest
  • RSS
  • Twitter
  • Beautiful Life
  • Becoming Rich
  • Beginners Guide
  • Extra Income
  • Productivity
  • Saving Money

Precautions before You Trade in Penny Stocks

October 13, 2014 9 Comments

Share this:

  • Tweet
  • Email

Trading penny stocks is considered a risky business for many and there are reasons why this is true and reasons why it is still a good option for making money. Experts define penny stocks as company shares below $5 each. Even though beginners start trading with these cheap stocks, they experience the volatility and risk immediately. However, before you start investing, take heed of these common precautions to start trading in a prudent and reasonable way.

Penny Stocks

Trading in itself is a risky proposition, trading in penny stocks is more so. Low liquidity, dependence on momentum and manipulative nature makes penny stock trading a riskier option than normal stock trading on stock exchanges through your broker.

I always feel penny stocks are not for long term holding. It’s perhaps riskier to have a buy and hold strategy for penny stocks. Your investment might lose all its value down the line if the company goes down. But that’s just my opinion.

(Must Read – How to control stock trading impulse)

Precautions before trading penny stocks

Some of the precautions are same as with any general stock trading precautions. I am going to list some of the precautions that are uniquely associated with penny stocks.

To start off, understand the basics

Some of these basics include understanding that there are risks involved. Risks come in two ways,

  • First, companies in the penny stock trade are not required to disclose as much information like those listed on the exchange.
  • Second, the prices are volatile and are prone to rising or dropping abruptly. You should always be comfortable with what you invest.

Gather as much information as possible

Since penny stocks are not traded on the stock exchange, they don’t necessarily file with the SEC, meaning they are not openly analyzed. This gives us little information to work with. Meaning you are betting on stocks based on other factors. You will need proper information and history of the company to make proper judgment.

It is important to do a background check on a stock before buying into it.Here’s a guide from SEC that tells us what information to obtain before investing in penny stocks.

Low liquidity of stocks

Penny stocks have low liquidity and prove difficult to find a buyer for. This becomes less enterprising when you have to lower the value to match buying price, rendering it impossible to make a profit.Stock Trading

You can’t trade penny stocks on major stock exchanges. Rather, penny stocks are traded over the counter, listed on Pink Sheets and the OTCBB. This makes penny stocks rather unique to other common stocks, and somewhat harder to find a buyer when you want to sell your stocks.

(See Also – 4 Stock trading mistakes to avoid)

Stay away from hype

The first thing you need to do is stay away from the hype that constantly erodes the market. Approach every trade with caution to avoid buying into a scam. I am enrolled in a newsletter that exposes such penny stock hypes. You can think about subscribing to this news letter if you want to trade in penny stocks.

You may run into unsolicited junk faxes and hyped up press releases urging you to buy. They come from promoters who are out there and their main objective is to puff up stocks claiming they promise explosive gains. While a stock potential to thrive is always there, do your homework first. Information is your most reliable tool and if you can’t match the hype with actual data just ignore it.

You are also likely to get calls that pressure you into considering low-priced stocks. Ignore them and hang up. This is a common practice that can influence your judgment into buying valueless stock. Get your daily dose of information from a trusted broker and don’t listen to strangers.

Focus on finding good stocks

Sometimes there are stocks from decent companies and are under the radar from everybody because they are either undervalued or new. Focus on finding penny stocks to invest. Hold them until the company gets a positive turnaround and find a buyer. Do not invest too much in a single stock as the risk becomes higher.

(Related – What is Forex  Trading, how to profit from it)

Don’t get attached to a stock

Sell upon finding a buyer and avoid hesitation either because you are attached to a certain stock, or you are too greedy. There is a reason why a stock maybe under the radar so if it starts to rise, why hold for longer? Getting attached to a certain stock is the last thing you want to do. After all you are in it to make a profit.

To many trading penny stocks is too risky, yet there are people who made huge profit by trading penny stocks. People get attracted to it as a few $ of price increase mean doubling or tripling entire investment dollars. To those trading penny stocks is not that risky. There are people generating steady income out of penny stocks.

As a buyer and investor, you should make proper decision and choice based on your need and your risk tolerance level.

Readers, have you traded in penny stocks or are you planning to trade a few to test the water? What risks you may have faced by trading penny stocks?

LIKE THIS POST?
I agree to have my personal information transfered to MailChimp ( more information )
Join our community of 8000+ subscribers to increase your net worth and build wealth
We hate spam. Your email address will not be sold or shared with anyone else.

Share this:

  • Tweet
  • Email
The tool that changed the way I manage my personal finance - Personal Capital, The Best Free Personal Finance Tool

Want to start a WordPress blog now? The onecentatatime.com blog is hosted by Siteground Web Hosting. For only $3.95 a month, Siteground can help you set up and host your website/blog quickly and easily.

About the Blogger Hi I am SB, a personal finance enthusiast with a career in software development. I am an immigrant to the USA since 2005, after being born and brought up in India. This 40 something technocrat lives and breathes personal finance whenever he gets time from the day job, job as a husband and a dad

Some links on this page may be affiliate links, if you make a purchase following the links, I may earn a commission. Read affiliate disclosure here
« Real Estate Investment in its Many Forms
7 Ways to Market Your Small Business at a Low Cost »

Comments

  1. Katie says

    October 13, 2014 at 3:43 PM

    Thanks for posting! I actually have some penny stocks that I was planning to trade – this post made me think twice!

    Reply
    • SB says

      October 13, 2014 at 3:45 PM

      Be cautious though. and do your thorough research

      Reply
  2. Jon @ Money Smart Guides says

    October 13, 2014 at 6:16 PM

    One of the things I’ve learned is how people tied to the stocks can influence the prices by issuing “news stories”. Since so few analysts follow these stocks, it’s easy to get a story out and have it gain traction. If you are thinking of investing, you need to treat news stories not on the company website with suspicion.

    Reply
    • SB says

      October 13, 2014 at 9:54 PM

      I’d add on to it, that you can keep your eyes and ears open by following stories at a genuine media publication like news papers. Company websites don’t usually publish troublesome news, which are life line for the investors.

      Reply
  3. [email protected] says

    October 14, 2014 at 7:07 AM

    Great tips SB! I never thought about the low-liquidity aspect, but it definitely makes sense, especially if that penny stock is plummeting to near-zero values. I used to love penny stocks since even a slight change could potentially earn a large sum of money. But, the same is true for slot machines…

    Reply
    • SB says

      October 15, 2014 at 12:19 AM

      Nice analogy, slot machines and Penny stocks, huh! No I don’t think penny stocks are as blind as slot machines.

      Reply
  4. Autumn says

    October 14, 2014 at 8:57 PM

    Great tips! I’ve never been too interested in trading penny stocks. I know some people are pretty successful at it, but I just don’t trust myself to keep my emotions out of it.

    Reply
    • SB says

      October 15, 2014 at 12:02 AM

      Good you are that way. If you’re not comfortable with this then stay away. Many more made profit out of trading general stocks.

      Reply
  5. jessica smith says

    September 8, 2021 at 5:06 AM

    This Article is very useful. A penny stock or penny share is the one that trades in a very small value of a current. Its price can be 1 US dollar, 1 Euro, or equivalent amount per share in your domestic currency. Low investment, in other terms, can be said as the stock is highly speculative.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.



Create your own blog in 20 minutes and $20

Personal Capital, a free tool to change your financial health today

I use and suggest Upstart, for your personal loan need

CreditKarma, a free tool to check your credit scorey

I use Coinbase, for my crypto investments

101 Cents at a Time

101 Ways to Earn Extra Money on the Side
201 Frugal and Perfect Birthday Gifts
101 Ways to Save Money Everyday
101 Ways to be Better and Successful at Work
101 Ways to Save Environment and Energy
101 Frugal and Romantic Anniversary Ideas
101 Low-Cost Men's Fashion Ideas
101 Personal Finance Tips
101 Ways to Reuse Household Stuff
101 Things to Do, When Nothing to Do
101 College Graduation Gift Ideas
100 Tips for Ecommerce Startup
101 Ways to Enjoy Indoor During Winter
101 Ways to Beat Procrastination

Popular Posts

Quick Cash - How to make $100 legally, in a day
Living well on less than $15,000 a Year
Top survey sites for side income
What to do when auto repair goes wrong
Where should I invest my money now?
20 Ways to be productive and happy at work
51 Ways to get out of debt
Be a better person in 15 days, 15 ways
Income ideas for retirees and senior citizens
51 side jobs for college students
Urgently need a large amount of money?
Should I buy or should I rent?
Best Personal loan providers
25 Ways to save environment
25 DIY car repairs to save money
How to decorate office cubicle
How to show your wife you care
50 Financial Rules for Success
51 Frugal weekend family activity ideas
Become Rich By Saving 1 Hour Of Daily Wage
How much do I need to save for retirement?
How to negotiate your salary

Follow us on FaceBook

About Author

SB

Blogger by choice and IT manager by profession. Finance is my passion and gardening is my greatest satisfaction. Born in India, settled in US, Husband and a father. I created this blog in 2011 with a vision to help others. Thanks for your patronage. More info on my "about" page.

View all posts


Subscribe

Join our community of 5000+ subscribers to increase net worth and build wealth

Advertisements

Personal Stories

How I got a new HP computer replaced
Was COVID circulating in USA in fall of 2019?
How my credit score went up 800+
Why I didn’t invest in Bitcoins
How I controlled impulses to buy things
Why this blog is named One Cent at a Time

Subscribe via Email

Site Disclaimer

Disclosure of Material Connection: Some of the links in this web site are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”
Read full Affiliate disclosure


One Cent at a Time is published by SB. The opinions expressed herein by him are his own and not those of his employer or anyone else. All content on One Cent at a Time is for entertainment purposes only. By reading this blog, you agree that SB and/or One Cent at a Time is not responsible for any actions taken after reading this blog. For the full disclaimer, click here .

Major Media Mention

One Cent at a Time Media Appearances

Copyright © 2023 One Cent At A Time · Designed by Nuts and Bolts Media