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Your Ultimate Penny Stocks Trading Guide


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Whether you are a beginner, avid day trader or just someone looking for an additional source of income, penny stocks can easily be your solution. While we have written quite the collection of penny stock related blogs, be sure to bookmark this as your definitive guide to penny stocks trading.

Nasdaq Penny Stocks

By the end of this, you’ll understand everything there is to know about penny stocks. We’ll start with what penny stocks are, how to trade penny stocks, and great hot penny stock tips. I’ll also cover other factors involved with penny stocks like Pink Sheets and OTC (Over-the-Counter), giving you everything you need to begin your penny stock trading adventures.

About Penny Stock Investments

So, you’ve decided to enter the fast paced, entertaining, sometimes lucrative world of penny stock investments. Penny stock trading breaks all the rules of traditional investing, and is a combination of timing, luck and research. While penny stock investments have the potential for abundant returns, underestimating the market flow will quickly put any delusions of grandeur to bed. For those of you readers who are perceptive investors, think of penny stocks as an opportunity for an additional income source. By understanding what to look out for you can arm yourself with the right information and techniques giving you a chance to do quite well trading penny stocks.

What Are Penny Stocks?

Initially, penny stock trading can be a confusing process to grasp. If you asked a group of investors their penny stock definition, you would most likely receive an assortment of answers all falling along the same premise. Penny stocks are priced from a few cents to five dollars a share. Those who are issued penny stock titles are usually smaller companies in the bio-chem, pharmaceutical, and medical industries (among others) who are launching new or experimental products. The investment process is simple, release a small amount of capital towards to purchase shares into a certain penny stock company for the potential of earning bountiful returns.

Any successful penny stock investor will tell you an immense amount of research is required for any potential pick. As you continue reading you will also learn how to pick penny stocks and the trading process.

Companies in the penny stock realm usually fail to meet the requirements of being included on major exchanges like the New York Stock Exchange (NYSE), though a majority are registered with the Securities Exchange Commission (SEC). While penny stock trading can be lucrative, these specific stocks are more vulnerable to manipulation schemes due to the lack of close monitoring and regulation.

As you read on you will also learn that trading penny stocks differs to the traditional stock exchange. Penny stocks use an over-the-counter (OTC) trading system. It’s a great alternative for beginners with little upfront capital and those who love the thrill of huge risk.

Where Do You Find Penny Stocks?

Penny stocks can be found in many different listing services. Usually, penny stocks can be found on certain exchanges, OTCBB, or on pink sheets.

Exchanges: There are exchanges that list penny stocks, such as the NASDAQ, though they require all of their stocks to meet a certain criteria in order to lower the risk. Stocks listed in the NASDAQ also need to include a certain amount of financial history and market capitalization in addition to being registered with the Securities Exchange Commission.

OTCBB (Over-the-Counter Bulletin Boards): While this listing service is more lax, even the OTCBB requires that all of the stocks involved must be registered with the SEC.

Pink Sheets: one of the most popular listing services, pink sheets are both praised and avoided. It’s the only listing service to include all of the penny stocks available because it has no listing requirements whatsoever. You have access to all of the low cost stocks on the market. While there is a huge risk when trading with pink sheets, many credit this particular listing service for why they made millions investing in penny stocks.

How Are Penny Stock Investments Different?

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Though they are both types of investments, penny stock trading and regular stocks have three major differences. Here’s how a penny stock investment is different:

Listing Strategy: Definitely the biggest difference between the two. Companies issuing regular stocks are listed on the major stock exchanges, like the NYSE (New York Stock Exchange). Penny stocks complete transactions and perform all of their trading over-the-counter (OTC), which we will get into later on.

NOTE: This difference can pose a major obstacle when selecting the best penny stocks to trade. There can be instances where a company’s stock price call fall into penny stock pricing, de-listing them from major exchanges. Removal from the exchange can also occur when the company fails to meet the minimum requirements or regulations. These factors can play a huge role in stock selection for any investor in the researching stages.

Pricing Structure: I covered this major difference above while explaining what a penny stock was, but as reinforcement a stock issued for a few cents up to $5 will receive a penny stock title. It’s because of the low issuance rate that attracts so many trading beginners who initially have small amounts of capital to invest.

Company’s Financial Worth: This was briefly covered above in the listing strategy, but there are some additional caveats to consider. A company’s penny stock price will not accurately reflect a company’s financial worth. Rather than waiting for time to tell if you made the right decision after buying an overpriced or underpriced stock, penny stock investments move at a much faster pace. Penny stock investors also uncover the company’s true financial worth during their research stages before they even purchase the penny stock.

Penny Stocks For Beginners: Terms You Need to Know

What Are Pink Sheets?

For penny stock beginners, the first major term you will need to understand are pink sheets. To put it simply, these are merely lists of certain stocks printed on pink pieces of paper issued by the National Quotations Bureau (NQB). Pink sheets are the only listing service to include all of the available penny stocks. These listed stocks can also be referred to as over-the-counter (OTC). As they have no listing requirements, these pink sheet stocks do not need to be listed with the Securities Exchange Commission (SEC).  Pink sheets are generally used by companies as an area to provide a detailed overview of their financial information, but many fail to provide little or no finance-related content making it very difficult to gauge the true risk when choosing pink sheet penny stocks.

There are many people who simply avoid pink sheets because of all the unknowns they carry. Even though they can be volatile, many penny stock millionaires credit pink sheets to being the source of their success. With that being said, those who have found success also put the necessary time into their research and source selections.

Investor’s Tip: A good idea when investing penny stocks is to buy from a company on the verge of massive growth.

tradingpennystocks

While many people will tell you pink sheet penny stocks aren’t worth your time, others will vouch they are definitely worth the risk. Ultimately it is up to you and what you discover during your research phase. Because these OTC stocks can be so volatile, arming yourself with information on the company’s history and their revenue process can help you make a smarter decision. Once your research has convinced you that they are about to take off is the only time you should pull the trigger on investing.

NOTE: Definitely proceed with caution when trading in pink sheets penny stocks and take the time to do all of the research involved. Because they are no listing requirements there could be illegitimate and scam penny stocks listed with those who have the potential to take off. Find out as much as you can about any potential selection, and be sure to diversify your portfolio.

What is the Over-the-Counter Bulletin Board (OTCBB)?

As we briefly mentioned the OTCBB earlier, you are aware that penny stocks do not need to meet the same requirements as regular stocks. Remember, you’re trading in one of the most volatile markets available, taking the time to understand every aspect is completely necessary.

Over the counter refers to stocks that are not being traded on traditional formal exchanges like the NYSE, TSX, etc. Over the counter means that the stocks are traded via a dealer network (or listing service) instead of on a centralized exchange. That’s why Pink Sheets can also be referred to as OTC’s.

Similar to pink sheets, the Over-the-Counter Bulletin Board is a dealer network that the United States uses as a vehicle for trading penny stocks. Broker-dealers perform all negotiations and complete the process through the OTC BB. Keep in mind while selecting OTC penny stocks is to consider that some companies may have started on major exchanges only to be delisted. Most of the time stocks are delisted due to falling stock prices or neglecting to meet certain requirements or regulations. This is why you always need to make sure you are doing an appropriate amount of research before investing.

How to Pick Penny Stocks

More often than not your first pick will be a loss. Take it as a learning experience. Picking penny stocks relies on hours of research and perfect timing. Luck alone will not be enough to rely on if you are trying to net six figures or more.

Learning how to pick the appropriate stock should be one of your biggest concerns. Most of the time you can use a process of elimination. As you have created a list of potential stocks to pick, you’ll need to first start by immediately rejecting certain types. Here’s how you identify your “rejection list” of penny stocks:

tradingpennystocks3Be Wary of OTC Stocks: Many times these companies are facing severe financial trouble such as bankruptcy, be thorough in your research.

Disapprove of Industries: If you disapprove of how industries operate or you just don’t fully understand them, just avoid them. No stock no matter the value is worth funding something that is morally conflicting.

Lack of Earnings: Definitely be cautious on any stocks offered by a company that has earned less than $10 million a year. See if you can find any press releases or reports reflecting their lack of earnings in addition to other pertinent information that may dissuade you further.

After removing these types of companies and stocks from your list, you will be able to select the most promising ones initially basing it off of your knowledge and experience. Once you have this list created, use the tips below to identify potential penny stocks to buy and what ones look the most lucrative.

Tools of the Trade: As picking stocks usually requires a complex amount of calculations and experience, use technical, quantitative, and qualitative financial research. Be sure to also keep an eye out for technologies that will also help you simplify the process.

Cash Flow: This may be an obvious statement, but do not forget to look at the company’s cash flow generation. A good sign is to always see it consistently increasing, unless you have seen capital expenditures or purchases leading to the outcome of expansion. In those instances it’s important to see what the company has spent the money on. Is this something that will give the company higher profitability? Also, be wary of a company that just took on a new debt to increase its cash flow especially, if it has had problems generating cash in the past.

Trade Penny Stocks

There are two places you can trade penny stocks. You can either let a broker-dealer assist you in your selections or you can use an online trading platform. It’s all based on preference. Do you like the face-to-face interactions? Or are you a fan of the convenience and speed online trading offers? Besides the NASDAQ, penny stocks will not usually appear on major stock exchanges like the NYSE. The OTC will be your go-to market to see the list of penny stocks. While some stocks will meet an assortment of requirements, pink sheet penny stocks will give you the full list on all of the penny stocks available. As a beginner, your first objective when starting your penny stock trading expedition is to usually contact a broker-dealer. It’s their job to arrange for the purchase and sale of stocks you are trying to sell or buy. If you want to do this on your own, you will need to learn how to watch the stock quotes in addition to understanding the stock market order process. For those of you who are managing their own portfolio you can use moderately complex online tools and merely learn the penny stock trade through practice.

As a penny stock investor, consider yourself in a casino rather than an exchange. Because of how volatile this market is, penny stock investing can seem like a gamble at times. There have been many occurrences of where the unexpected happens and what you predict doesn’t. Just because a stock looks like it will fail doesn’t mean it will, sometimes those are the ones to skyrocket in value. At less than five dollars a share penny stock trading has a limitless amount of room for success, even with it’s difficult process. Once you understand the basics, you will be able to identify the best stocks to invest in, making huge returns and most importantly making it worth your time.

I’ve emphasized this repeatedly, but it is the most major component to consider when selecting the penny stocks you want to purchase. Research, research, research. Leave no stone unturned. Start with each company’s financial history and earnings. Then look at press releases, quarterly reports, announcements, anything you can get your hands on from each company so you can make an intelligent decision. Never base any of your decisions on hype, always take the time to find the facts. That’s how you will find yourself receiving higher returns as you fatten your portfolio.

Penny Stock Trading Tips

In order to find success when trading penny stocks there are a few tips to assist you as you begin. While we all have heard of the rumored penny stock millionaire, it is no easy feat. For those of you using penny stocks as a secondary source of income, please know that it can happen, IF you make the right decisions. Here are some great tips to follow to help you reach that million dollar return.

tradingpennystocks2Trade Quick, Trade Accurately. Penny stocks are more focused on the “now.” They move at a much faster rate, so you will need to practice on perfecting what are the right moments to buy or sell. A difference in minutes can mean the difference in a win or a loss. Look at stable upward trends and bide your time for the perfect time to strike.

Don’t Get Attached. You are not in the penny stock trade to get attached to investments and companies. Your goal is to make as much money in the company as you possibly can before selling. Forget what you learned for traditional day trading, quickly pick up on how others make their decisions. Master the penny stock trade, and collect your rewards.

Scale the Peak. Look at the day-to-day flow of the OTC market, and see where certain penny stocks are peaking. Researching the company in advance will definitely help give you a better sense of the management structure. A poorly managed company will not peak as high as a well-managed one will.

Go With You Gut. Ultimately your gut will be a determining factor. If you ask some of the most successful penny stock investors how they made millions, they will tell you the same thing. Trust your instincts but be sure to base it off of facts and not emotions.

Keep Learning, Continue Trading

Just because this blog gave you an overview of what penny stocks are doesn’t mean your investment education is over. As a penny stock investor you need to make sure you are keeping yourself updated on the latest developments, constantly looking for new techniques, tools, and software that will help you do more thorough research and make better decisions in the end. Signing up for top penny stock site newsletters will also help, as professionals give you their tips for who to pick. Like I said above though, be sure to support those tips with cold hard facts so you separate the bias with the truth. Stick to these tips and you can be sure that your time investing in penny stocks will be a fruitful one!

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Pink Sheets Penny Stocks Trading


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Pink Sheets Logo

How The Pink Sheets Stock Quotation System Functions

The OTC Markets Group, Inc.  runs a stock quotation system at otcmarkets.com that facilitates trading in what has traditionally been known as pink sheets stocks.  The moniker “pink sheets” is from the days before electronic trading.  The predecessor to The OTC Markets Group, which was known as the National Quotation Bureau, used to publish a daily list of stocks that were traded outside of regular stock markets on pink sheets of paper.  Stock traders and investors looking for the latest price and sales information for pink sheets stocks would visit a brokerage firm or call their broker to find out the latest price and sales information for pink sheets stocks they were holding or considering buying.  With the advent of electronic trading, The OTC Markets Group no longer publishes stock information on pink sheets of paper.  However, the well-known pink sheets name lives on amongst penny stock traders and investors, both through tradition and the fact that the lowest tier of stocks that OTC Markets Group quotes is known as OTC Pink.

The OTC Markets Group’s stock quotation system is segregated into three marketplace tiers that clarify which types of stocks are quoted.  The stocks are segregated in this manner to make it easier for the stock trading and investing community to understand the types of stocks traded on otcmarkets.com.

  • OTCQX is the top tier.  Companies in this top tier must meet financial standards, be current in their disclosures to regulators, and be sponsored by a professional third-party advisor.
  • OTCQB is the middle tier.  The middle tier is designed for small or developing companies that are reporting to a United States regulator (Securities and Exchange Commission (SEC), bank, or insurance). This tier does not have minimum financial standards, and includes penny stocks and shell companies that are current in their disclosures to regulators.
  • OTC Pink is the bottom tier.  The bottom tier is what traders and investors traditional think of when they are considering pink sheets stocks.   OTC Pink can include any type of company, both those that are current in their disclosures to regulators and those that are not.  It can also include companies that are shell companies, development stage companies, and companies that are under financial strain.  To help traders and investors understand the risks associated with stocks that trade on OTC Pink, the tier is further segregated into the following categories:Pink Sheets Penny Stocks Categories
    • Current Information – Companies that follow the Alternative Reporting Standard or International Reporting Standard by making filings publicly available through the OTC Disclosure and News Service.
    • Limited Information – Companies with under economic distress, with financial reporting problems, or in bankruptcy that make the limited information they have available to the public.
    • No Information – Vompanies that are either not will or not able to provide disclosure to the public markets via a regulator, an exchange, or OTC Markets Group.
    • Caveat Emptor – This means Buyer Beware.  Companies in this category have a public interest concern associated with them, security, or control person which may include but is not limited to a spam campaign, questionable stock promotion, investigation of fraudulent or other criminal activity, regulatory suspensions, or disruptive corporate actions.
    • Grey Market – There are no broker-dealers quoting a security that trades in the grey market. It is not listed, traded or quoted on any United States based stock exchange or on any of the OTC Markets Group marketplaces. Trades in grey market stocks are reported by broker-dealers to their Self Regulatory Organization (SRO) and the SRO distributes the trade data to market data vendors and financial websites so investors can track price and volume.

The Pink Sheets Stock Quotation System Trades More Than Penny Stocks

The OTC Markets Group (otcmarkets.com) stock quotation system facilitates trading in approximately 10,000 Over The Counter (OTC) securities.  Despite the popular association of otcmarkets.com/pink sheets with penny stocks, the reality is that companies of all sizes choose to list their stocks on the otcmarkets.com stock quotation system to avoid having to reveal too much information via stock market required filings.  Some of the largest and most well known companies in the world that are based outside of the United States choose to have their stocks trade on otcmarkets.com to gain exposure to United States investors while avoiding stringent stock market reporting requirements.  These stocks trade for well above the $1 per share penny stock threshold.  The lack of SEC reporting requirements for stocks that trade on the lowest tier of otcmarkets.com, OTC Pink, attracts many companies that have stocks that trade in the penny stock range below $1 per share, and either do not have the resources to keep their SEC filings current or do not wish to disclose company information via SEC filings.

Trading Pink Sheets Penny Stocks

Pink Sheets Penny Stocks
Due to the lack of regulatory disclosure requirements, pink sheets penny stocks that trade on the OTC Pink tier are some of the most treacherous stocks to trade.  It is very important for investors and traders considering buying pink sheets penny stocks to do proper due diligence on the companies behind the stocks prior to buying.  The information provided about pink sheets penny stocks on mainstream financial information and news sources, such as Yahoo Finance and Google Finance, is usually quite limited.  The OTC Markets Group’s website (www.otcmarkets.com) is an excellent place to start a due diligence assessment of pink sheets penny stocks.  The information provided on otcmarkets.com includes:  charts/price history, company structure and contact information, share structure information, recent news, and company financials and filings.

At the very least, penny stock traders and investors need to determine the OTC Pink category that OTC Pink penny stocks are in before committing money to a penny stock trade or investment.  The gains in OTC Pink penny stocks can be tremendous, which is why so many investors and traders are willing to risk their capital on these stocks; however, the risks are also quite high due to the precarious condition many of the companies behind these penny stocks are in, so a cautious approach is the best approach.

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Understanding the Definition of Pink Sheets


Pink Sheets

Learning About Pink Sheets as a New Investor

If you are new to investing, you might be wondering about the definition of pink sheets. Investing profitably requires you to understand a wide range of financial jargon, and most unfamiliar terms can be understood quickly by examining context or by consulting an investment glossary. Other terms might not be so simple for you to comprehend. If you are interested in maximizing your income through investing, it is important to learn the meaning of key terms and phrases the definition of pink sheets, in particular, is crucial for your understanding of the market and your ability to earn income.

Uncovering the Definition of the Phrase

Pink sheets are simply the daily publications produced by the National Quotation Bureau. These publications contain bid and ask prices associated with OTC, or over-the-counter, stocks, and they include information on the so-called market makers responsible for trading them. The companies quoted on pink sheets do not need to file with the Securities and Exchange Commission, nor do they need to meet requirements for minimum trading. This makes the sheets highly useful for those who are looking for a market edge. The reason these publications have their colorful name is because the documents used to be printed on pink paper.

Improve Your Investments by Understanding Pink Sheets

Understanding pink sheets can help you diversify your portfolio considerably. These publications contain information that you will not find in other places like your trusted daily finance newspaper. Additionally, the proper reading of these documents can give you an edge over other investors. This is important if you intend to earn significant profits in the current, troubled economic landscape. Although pink sheets may seem somewhat abstract to you as a new investor, they can give you the advantage you need to earn impressive profits.

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Where to Invest In Penny Stocks


Where to Invest In Penny Stocks Depends Upon Your Investment Style

Where to Invest In Penny Stocks

An investor or trader who is looking to invest or trade in penny stocks has many questions, such as where to invest in penny stocks?  The answer to this important question regarding where to invest in penny stocks depends upon one’s investment or trading style.

If one is a long term investor or a casual investor or trader, then any number of well known brand name stock brokerages such as Fidelity Investments, TD Ameritrade, or E-Trade are suitable for penny stocks investing and trading.  Unlimited shares of penny stocks can be bought and sold online for one flat fee of $10 or less through many brokerages.  These same brokerages also offer a great deal of information about penny stock companies, such as company contact information, company news releases, share structure, filing status, and if they are a Security and Exchange Commission (SEC) reporting company, company SEC filings.

For more active traders, the question regarding where to invest in penny stocks is a bit more complicated.  For additional fees, the brand name stock brokerages offer higher levels of trading services that can greatly aid active traders with getting into and out of penny stocks at specific price points, including Level II Quotes that provide all of the best bid and best ask quotes and the associated order sizes for a stock.  Some even offer proprietary trading products that let one test out penny stock trading techniques.  This level of service is suitable for most penny stocks investors and traders.

For penny stock traders who want even more control over their trades and want to be able to get into and out of penny stock positions at a rapid pace and at specific price points without delay, direct access trading systems (DATs) might be the best way to trade penny stocks.  DATs trades cost more, but the additional order routing control and order execution speed make DATs worthwhile for highly active traders.  DATs make it possible for a trader to route a stock penny stock order directly to a market maker, a specialist, or electronic communication networks (ECNs), which provides much faster order execution than online brokers.

Most United States based brokers that facilitate trading in penny stocks do not allow margin buying and shorting of penny stocks.  Traders that wish to buy penny stocks on margin or short (sell short) penny stocks, should consider opening up an overseas penny stock trading account for additional trading flexibility.

Where to Invest In Penny Stocks – Some Investors Open a Separate Account

Some investors and traders find the easiest way to separate their regular investments and trading in NYSE and NASDAQ listed stocks and investments and trading in penny stocks is to open a separate account.  This provides a firewall between pools of money that have been set aside by an investor or trader for a specific purpose, such as long term investing in listed stocks and investing and trading in penny stocks.  It also helps investors and traders to keep their profit and loss results straight from different investing strategies.  Ultimately, where to invest in penny stocks depends upon one’s level of investing and trading activity and whether they want to separate their penny stock investing and trading from their other investment accounts.

See Also: Why Invest In Penny Stocks?

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