day trading penny stocks
Everyone wants to make some money by investing a part of his savings in the stock market. The stocks are seen as a very attractive form of investment that offers opportunities for making easy profits. In reality investing in stocks carries a lot of risk and requires in depth knowledge. Those with less money to invest in the regular and pricy stocks are advised to trade in the small cap or penny stocks.
What are penny stocks?
The penny stocks are shares of some companies the price of which is less than 5 dollars per share. Penny stocks their low prices allow the investor to trade in thousands of shares with just a small amount of money. The penny stocks are the shares of any company which is not listed in the major US stock exchanges namely NYSE, NASDAQ or AMEX. The Securities & Exchange Commission defines the penny stocks as a low priced and speculative security of small companies.
These may not be traded in the regular exchanges and may be listed in over the counter listing services such as OTCBB and Pink Sheets. These stocks are also referred to as microcaps, small caps or nano caps. The share price determines the penny stock status according to SEC definition as any stock with a price of fewer than 5 dollars. The market capitalization of the penny stock companies are usually under 500 million US dollars. In the UK, the penny stocks are called penny shares. They refer to the stocks and shares of small cap companies having a market capitalization of less than one British pound and the company?s market capitalization is less than 100 million pounds. The UK authority which regulates the risk markets of penny shares with its warnings is the FSA, the Financial Services Authority.
Reasons for trading in penny stocks:
Day trading in penny stocks is considered a good way to make the most profits in the shortest time. In today?s market, the penny stocks give the highest gains on a daily basis. Some people who are new to the stock markets and would like to learn the basics of stock trading and trading in low priced shares seem to be the right testing ground to do that. This is a good way to start as the loss is minimal with the very low priced penny stocks, making the cost of learning minimal. But there are some experienced traders who may like to hedge his positions by taking a speculative chance with the penny stocks. The penny stocks are attractive to those risk takers who have the money to spare as they invest only a small amount expecting to make hefty profits. Sometimes the trader has some inside information about a penny stock company that its prices are likely rise many fold and sees the opportunity to make big profits by buying their stocks before the news is out.
The penny stocks are seen as a hobby that pays off with all its excitement as the price differences within a couple of hours can yield big profits, if the right stocks are picked for trading. An experienced trader has the knowledge of picking the shares that have the potential to bring huge profits. Penny stocks are a good way to have a balanced spread of risks and rewards in the portfolio. Trading in the penny stocks can be a hedging tool when the price of the bigger stock, that the trader has an open position has nose-dived. The experienced trader knows to offset the loss of the expensive stock with the profit from the penny stocks. Addition of penny stocks is a great way to increase the diversification among the many sectors so that they can be traded at the appropriate time to maximize the profits or to hedge the leverages earned when the investments are spread over multiple sectors. The trader should determine if the penny stocks are suitable for his investment based on various factors. It greatly depends upon the amount of risk he can take or to what extent he can tolerate losses, his financial status and situation, his level of aggression in trading targets, the returns he wants and his knowledge and experience with investing in this market.
Pink Sheets:
It is advisable to avoid these shares. The pink sheets are the stocks of companies that are not bound by any regulation and therefore hold no responsibility to the investor. They have very low trading activity and irregular making them highly impractical or sell. They follow no rules and listing requirements. This makes it even more difficult for the investor to seek remedy. There is no open and official report or information about the company?s business or the trading prices.
The Risk Factor of penny stocks:
The Steep rise and fall in prices of penny stocks and the low prices and the potential for immediate rise is reason enough for the investors to try their luck in the penny stocks to make quick money. On the flip side, the penny stocks may also lose their value and lead to heavy loss. The SEC has warned the investors that penny stocks are high risk investments and new investors should be aware of the high risks before they enter this market. This is because of the absence of any liquidity or financial reporting of any kind and potential fraud as the trades are carried out in low volumes and in irregular manner. Penny stocks in general are considered highly speculative especially those stocks whose volumes are very low and are traded over the counter. The Securities & Exchange Commission had issued a warning that it may be difficult to sell the penny stocks once they are bought because they are traded very infrequently. The lack of quotations of the prices of the penny stocks is another factor which makes it nearly impossible for pricing them correctly. The investors in penny stocks should therefore be aware that any adverse change in the prices of these stocks can lead to the loss of their entire investment.
The lure of high profits with low investment may be hard to resist. Considering the volatility of the stock markets and the risks involved in holding overnight positions of higher priced stocks, and the potential losses due to unforeseen events the investors keep looking for other alternatives. Day trading in penny stocks is an option that requires proper knowledge and the right training for any investor to make money on a daily basis.
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