Investing in and trading penny stocks may seem like an ideal way for a beginner to get into the stock market. Penny stocks are stocks that are usually sold for less than $5 or even $1 in the United States. Since there have been problems with penny stocks in the past, including price manipulation by unscrupulous companies and traders, it's important that you are knowledgeable about the companies in which you are investing. Invest in penny stocks to make money over the long term, not a quick dollar right away.
1. Research companies whose stocks are low enough to be considered penny stocks. You should understand the business of the company you choose. If reading a description of what the company does leaves you confused, it's best not to invest in it. When you pick a company, you should have a feel for how it is managed and run, as well. Read the company's prospectus so that you know how your investment is going to be used. The prospectus also explains the company's history and cash flow. You also want to choose a company that trades at a relatively high volume, so that you are not stuck with the stock when you want to sell. Ideally, the company will trade daily.
2. Participate in paper trades before actually laying down your money. Follow the company you've chosen for a few days or weeks with pretend money. Take note of when the stock goes up or down and whether or not it is regularly dropping in price.
3. Invest with an online or other discount broker when you feel ready to make a real trade. Some brokers charge a flat fee for investing. Many charge extra for penny stocks, since they usually do not make as much money with them. Look for a broker that doesn't have a minimum amount requirement.
- Keep an eye on the bid and ask spread. The bid is how much investors are willing to purchase the stock for, the ask is how much investors want to sell it for. Spread is the difference between the two. If the spread is large, that means sellers want to unload the stock for a high price, but buyers aren't willing to pay much for it.
- Stay away from what are known as blank-check IPOs. Investing in a blank check means you don't know where your money is going or how it will be used.
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