Penny Stocks for Dummies Guide – A Quick Synopsis for the Neophyte Trader

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I thought I’d sum up the basics of penny stocks in one simple post that anyone can read and immediately gain a good foundation of what they are and some of the better ways to find profitable penny stocks to buy.  The fact that you are reading a penny stocks for dummies article makes you not a dummy.  Information is how anyone succeeds, and penny stocks are no different.  It’s a smart thing to have a good understanding of penny stock investing and performing adequate research before even thinking about buying penny stocks.  Bear in mind that each of following categories can certainly (and should) be looked into with much greater detail but this should get you started.

What Are Penny Stocks?
A penny stock has many definitions.  For those who only trade on the large stock exchanges a penny stock is any stock that is less than $5 per share.  The other definitions are generally based on market value.  The market value is the number of shares multiplied by the price per share.  Penny stocks are usually stocks with a market value less than $200 million (this number can vary.)  The most obvious definition is any stock with a price less than $1 per share.  The last definition you may see is any stock that is traded OTC (over the counter) or on the pink sheets.

Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information about them because the company isn’t required to have independently audited records and is never covered by a stock market analyst because virtually no one would read about it or pay for the information.

Penny Stock Risks
Without a doubt, the penny stock carries more risk than the average stock.  The primary reason for this is the low value of the company makes the price easy to manipulate by wealthy individuals or small groups of people.  A 100 billion dollar company can’t easily be manipulated by any individual person.  A $50 million dollar company however can have 20% of the whole company traded by thousands of different individuals or small trading groups.  Surges in buying and selling activity can manipulate the value of the company on the short term causing inexperienced traders and investors to change their buying and selling activities.  This type of activity can be shady at best.  Worse still, other people move beyond shady and into scams.

There are two primary penny stock scams that focus on the inexperienced traders and investors.  For traders the biggest risk is the pump and dump.  Here an advertising campaign will get a certain penny stock very hot by getting people who aren’t even into penny stocks, buying them.  Then this will trigger your trading signals which under natural conditions would make a great trade.  The scammers then dump all of their stock quickly into the buying spree.  Once the marketing campaign is over and the scammers made their money, they are out and the price collapses.

Penny Stock Trading and Investing
In general when penny stock trading you’ll often do better with short term trading rather than holding stocks for years. This is because the longer your trade is the more risk you apply to your trade with scammers coming in or companies having negative information released. When penny stock investing you’ll also do best if your good at getting information no one else has. This is usually done by talking with people who work at these small companies to see how viable the company truly is. Those who are willing to go deeper than the information available on the internet can really win huge with penny stock investing.

Traditional technical analysis (i.e analyzing stock charts) and fundamental analysis (analyzing the financials) can also both help narrow down a profitable penny stock from a dud so don’t underestimate these traditional yet very effective stock screening methods.

Hopefully this provides a good “penny stocks for beginners” overview but don’t stop there; educate yourself further by reading my other posts and consider subscribing to a reputable penny stock newsletter. The more informed you are with proven penny stock strategies and solid investing advice, the better your outcome.

Follow a System that Works
Now if you’re really serious about making money trading penny stocks I highly suggest you subscribe to a reputable newsletter that provides real-time trading alerts and has a proven track record. Trading penny stocks is a high risk, high reward venture so it is absolutely vital to have a seasoned professional guide you.

One such newsletter I can recommend is called Microcap Millionaires run by Matt Morris and the main reason I like his service (aside from the nice gains) is his straight honesty – Unlike other newsletter and alert services out there that are often nothing more than paid penny stock pumpers, Matt is an actual trader who cuts through the bull and gives you his straight unbiased recommended trades.

But before I go any further I must say that though Matt’s real-time alerts can be extremely profitable, if you’re the type of person who has a hard time following instructions and instead lets your emotions drive your trades then please do NOT bother subscribing as you’d only be wasting your time and money. The reason I say this is because for you to really succeed with Matt’s service (or any trading methodology for that matter), you need to be highly disciplined in your trades. For example if you buy a recommended stock and it jumps up to the target price, sell your stock and lock in your profits. Don’t get greedy and hold the stock longer than suggested or you could very easily get burned. Also do not invest too much of your capital in any one stock – yes the majority of his trades are profitable, often very profitable, but you still need to spread the risk evenly so as to protect yourself from the odd potential loss.

Now just to forewarn you, when visiting his site the first thing you’ll probably notice is, well, the intro video is a bit cheesy (sorry Matt 🙂 ). Okay so he may not be the best video producer but he’s damn good at picking penny stocks!  And if you can simply follow his stock alerts with discipline, you’ll likely be shocked by the type of consistent profits you can yield. Click here to learn more about Matt’s Microcap Millionaires newsletter.

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4 comments ↓

#1 keith on 11.09.10 at 10:01 pm

Great tips for beginner traders and excellent reminders for anyone who trades penny stocks.

Thanks.

#2 Jared O'Dell on 02.19.11 at 3:14 am

Thank you for the insight

#3 Cheryl on 05.30.11 at 4:38 pm

“a reputable penny stock newsletter” Would you have any recommendations on which are reputable?

#4 Anonymous on 06.10.11 at 9:45 pm

Thanks for your comment Cheryl – I’ve now updated the post with one I consider reputable. 🙂