Buy Penny Stocks Guide

One of the first questions you may have is how to buy penny stocks.  Before we get there though, you should first understand a little about what penny stocks are.

Penny stocks, also known as nano stocks, dollar stocks, and micro cap stocks are by definition any stock trading below $5 per share.  As such, penny stocks do not typically trade on major stock markets like the National Association of Securities Dealers (NASDAQ) or the New York Stock Exchange (NYSE), unless of course the stock temporarily dips below $5.  Instead, you will find penny stocks listed on the over-the-counter (OTC) and the Pink Sheets markets.  Unlike the OTC however, the companies listed on the Pink Sheets market do not need to file current financial reports with the Securities and Exchange Commission (SEC).

So, how to buy penny stocks?  Well, similarly to buying other types of stocks, your main two options for buying penny stocks are via a full service brokerage or using a Discount Brokerage account.

Using a full service brokerage will mean dealing with a penny stock broker.  You give your broker (usually done over the phone) the number of shares you wish to buy, the maximum price you wish to pay, and the ticker symbol of the stock.  The stock broker would then attempt to purchase these stocks on your behalf.  The stock broker gets payed either through a commission per transaction or more commonly through principle transactions, meaning they would make money on the difference between the bid price and ask price, known as the spread.  The main advantage to using a full service brokerage account is that your stock broker can typically give you investing advice as well as facilitating the trades for you.  The main disadvantage however, is these services are typically expensive.  If you decide on a stock broker, be sure to find one that is reputable and trustworthy with a solid track record.

Alternatively, you may create an account with a Discount Brokerage firm.  Once you’ve created an account, you can make trades online and with relatively little effort.  The main advantage with a discount brokerage account is that it’s much cheaper than using a full service brokerage but you need to know what your doing so it’s not advised for novice investors.  Also, for very thinly traded penny stocks, you may simply not be able to execute your desired trades for the price you want without the use of a stock broker who has more resources at hand.

Knowing how to buy penny stocks is one thing but knowing the best penny stocks to buy and when to sell them is another.  Remember, trading penny stocks has a very high risk attached to it.  Yes the rewards can also be great, but you need to know what you’re doing so whatever you do, don’t just go off and start buying random penny stocks hoping they’ll appreciate in value.  Get educated first.

With an interest in buying penny stocks, you almost certainly would have heard the term “pink sheets” or just “pinks” at least once.  The term “pink sheets” actually comes from the color of paper the stock quotes were originally printed on but now it refers to the electronic quotation system used for a variety of OTC securities.

Pink sheets penny stocks are essentially stocks with a price below $5.00 that trade on the Pink Sheets electronic quotation service. But what exactly is the pink sheets and how does it differ from the OTCBB and major markets like the NASDAQ and NYSE?

An important point to note about the pink sheets is that it is not a registered stock exchange but a computerized quotation system and the stocks that are listed on the pink sheets are generally stocks that could not meet the specific requirements of a major stock exchange.  Furthermore, unlike stock exchanges the pink sheets are not regulated by the Securities and Exchange Commission (SEC).  As such there are virtually no requirements for historical or even current financial data though companies issuing stock on the Pink Sheets are at least bound by both federal and state security laws.

Obviously due to the lack of regulation, the pink sheets can be a dangerous place to buy penny stocks.  Therefore, you really need to perform your due diligence on any potential company your interested buying stock in.  Companies can vanish with out a trace from the pink sheets along with your hard earned cash.  Due to these factors in addition to the extreme volatility and unpredictability of pink sheets penny stocks, it’s highly recommended that an investor stick to trading with money he can afford to lose and no more than 10% of of his portfolio.

Having said all this, by exercising both caution and experience and by implementing specific stock strategies, a lot of money can be made in the pink sheets.  Why?  Simply, pink sheets stocks can double or triple in price very easily.  A 5 cent share for example can quite easily become a 10 cent or 25 cent share in a matter of weeks,  leaving a 100% or 400% gain respectfully.   Seeing that the average stock goes up a measly 6% per year, it’s very easy to see the lure of penny stock investing.

Whether you decide to buy penny stocks on the pink sheets or on the OTCBB, by being very selective in the stocks you choose in addition to using various proven stock strategies to limit your risk, this portion of your overall portfolio can very easily become your most profitable one.