Rather than being rendered too risky or full of scams, penny stock investing should be viewed as the common man’s venture capitalism.
The idea of investing in penny stocks often lacks quality and popularity because it’s not exactly in league with the “aristocratic” stocks and style of investing seen on Wall Street.
The Street labeled it as Wall Street’s Wild, Wild West, an untamed world of investing detached from the glitz and media coverage that comes with stocks that are traded on the major exchanges.
And while they are quite removed from all this glitz, penny stocks can be just as lucrative.
Anyone with a scattered account has the ability to invest in penny stocks.
What is a Penny Stock?
Essentially, it is a low-priced, small-cap stock that rarely costs a penny, despite being so named.
The Securities and Exchange Commission defines a penny stock as anything that’s traded under $5.
It’s not impossible to isolate the profitable ones, either, regardless of whether it’s a public company, private, or a startup.
Look for small-cap companies with solid underlying business plans, sturdy financials, and informative footnotes.
Penny stocks can be traded on any exchange, but the majority can be found on Over-The-Counter Bulletin Board (OTCBB) and Pink Sheets.
Pink Sheets is best to be avoided, as it is not registered with the SEC and does not enforce any listing requirements.
These are where the notorious “shell” companies can be found that afforded penny stock investing its bad reputation.
OTCBB does maintain some listing requirements, and for this, it has retained more legitimacy.
Cheaper stocks listed on NYSE and NASDAQ aren’t typically considered penny stocks, but they still yield many of the same benefits without as much risk because of those exchanges’ strict listing requirements.
Public vs. Private
Overall, it’s generally easier to invest in public companies because they can be bought and sold on the stock market and therefore have superior liquidity to their private counterparts.
Just because private firms are relatively illiquid doesn’t mean they won’t make profitable investments.
They require much longer investment time frames.
Terms for buying shares of a private firm also must be negotiated between the buyer and seller, rather than on an exchange like public shares.
Public companies are required by the SEC to publicly publish quarterly financial statements every year.
Private companies are free of this obligation; however, because of this, it can be difficult to determine the financial soundness of the firm.
The over-criticism of public companies by Wall Street analysts often deteriorates their long-term profit potential because they become so overly aware of their quarterly goals.
Like stated above, private firms are often better suited for the long term mainly because they are out of Wall Street’s reach.
Yet angel investing in public or private companies should be approached with tact and trepidation.
Early-stage investing offers the most multifaceted opportunities available, but it is crucial to thoroughly research any company’s background before diverging.
Common Kid’s Venture Capitalism
A 16-year-old high school junior from Wyckoff, New Jersey, made a small fortune from trading penny stocks under his desk.
It all started one day when Connor Bruggemann decided to play sick and stay home from school.
He already had saved a substantial amount of money from spending the past two years working as a busboy and waiter at a local restaurant.
On that day home from school, Bruggemann put almost everything he had into American Community Development Group Inc. (ACYD), a penny stock selling for $0.003 a share.
Over the next 17 months, he principally traded penny stocks, growing his meager $10,000 into a hefty $300,000.
According to The Verge reporter Ben Popper, Bruggemann would buy and sell six figures of stocks from his lunch table, the bathroom, and, occasionally, on the sly while at his desk.
What Bruggemann has accomplished isn’t new.
There are plenty of examples to be found on the Internet where people have amassed small fortunes from penny stock trading.
Bruggemann idolizes one of those people, Tim Sykes, an incredibly successful investor whose origins in investing reflect Bruggemann’s.
Sykes now sells his techniques to customers, promising that they will get rich by trading penny stocks in just seven days.
Even though this sentiment seems reflective of something you would see on an infomercial and borderline unscrupulous, technology has made trading on this level more accessible for the common individual.
Although millions upon millions cannot be made with just a few penny stock trades, it is possible to substantially grow wealth by doing so in a sound and knowledgeable fashion.
How to Get Started
With copious amounts of information readily available, getting started in penny stock investing can seem rather daunting. It can be hard to know where to turn.
Some people prefer to trade on their own or use brokers like E-Trade, TD Ameritrade, or many others.
Whatever your trading preferences may be, keep the following general rules of thumb in mind…
It is imperative that you never risk more than 30% of your trading capital in one investment.
No matter how confident of a certain trade you might be, placing that much weight on one move could be ultimately fatal for your investing enterprise.
There will always be some winners, and there will always be some losers.
Limit losses to 10–15% of the investment.
If you recognize a trade is not working out as planned, move on.
Take profits, partially or in full, when you have a winner. A winner can easily and quickly become a loser. Take profits when you can, and don’t be greedy.
Finally, be careful of buying “large gap ups.”
Pre-market demand can force the stock to open much higher than it had closed previous days.
Once the stock has opened up, existing holders will most likely sell, pushing the stock down.
This, in most cases, ruins any chance for momentum.
Before investing real money, you can experiment with what Peter Leeds calls “paper investing” in order to become more versed in penny stock trading rather quickly.
Begin with an imaginary $50,000.
Monitor real penny stocks and choose which ones to purchase with the imaginary money, recording any trades you make, both buying and selling.
Invest in numerous penny stocks, as opposed to only one or two, in order to gain the absolute most from your “paper” experience.
You should acquire a good understanding and comfort level rapidly when real money isn’t at stake.
Then that comfort and confidence can be transferred to the real thing for successful and profitable penny stock trades.
Until next time,
John Peterson
Pro Trader Today