Penny stocks allow investors to diversify their portfolio by targeting areas of the market that are more prone to volatility, which can lead to outsized returns for the portfolio. Penny stocks are self-descriptive, each share sells for as little as a penny to as much as $5. However, these mere pennies can be far away from the intrinsic value of the stock, either higher or lower, and thereby cause a high degree of risk, or reward.

Nature of Penny Stocks

Penny stocks allow access to smaller markets that aren’t adequately covered by large or even mid-cap stocks. Often times, they don’t have earnings, and sometimes not even revenues, and, as such, no price to earnings (P/E) ratio can be applied. This makes the value of a penny stock difficult to monitor or assess. Add to that, few analysts follow penny stocks, as it is not cost-effective for brokerage houses to pay analysts to do so, so these instruments often fly under the radar. Penny stocks are frequent in industries such as pharmaceutical bio-tech start-ups, other developmental stage companies, as well as businesses in other speculative industries.

Penny Stock Risks

As these instruments are not frequently followed by analysts; it may be difficult to obtain enough information about management to assess their honesty and integrity. In addition, revenue streams may not be stable, and, as a result, it may be difficult to monitor the net book value of the business. It is also difficult to determine whether the company has sufficient assets or financing (either equity or debt) to remain in business until stable revenue sources arise.

The risk of owning stocks is the amount of your initial investment. That is the beauty of owning stocks, particularly penny stocks. As such, it may be useful to make a small investment in a penny stock. These are risky instruments, and the volatility of the price of these stocks illustrates this. Day trading penny stocks is particularly risky, however, selecting a company with volatility as high as penny stocks, one has to really monitor the entry price.

Starting to Invest in Penny Stocks

If you want to learn penny stocks and start investing, you should begin by obtaining a broker that allows access to OTB markets (off the board) which give you access to penny stocks. Search for industries that interest you and try to find companies with strong management, whom have access to financing, and who have an idea that can fill a need that customers have. Penny stocks have risks associated with them, but can also yield fabulous returns.

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Day trading penny stocks can be pretty risky.  It holds the same risk as any form of day trading, but penny stocks have the additional traits of being thinly traded, extremely volatile, and easily manipulated.  Sometimes this manipulation is easy to spot, and you can actually trade in the opposite direction of the manipulation (usually shorting an inflated price).  Whether or not you know how to spot and manipulate the manipulators, day trading penny stocks is a little different from trading the big boys.

There are many ways to define a penny stock.  Some people assume every stock under $5 is a penny stock, while officially a penny stock must be traded off the major exchanges, on the Pink Sheets and OTCBB.  More accurately, a stock trading at less than $1 (literally trading for pennies), is another way people will define a penny stock.  Some of these stocks even trade a minute fractions of a penny, which is where traders get themselves into trouble, but we’ll get back to that in a moment.  The point here, is that there’s no specific qualification for a “penny stock.”  Traders will collectively refer to stocks that hold any or all of the above qualifications as “penny stocks” and it is usually meant to be an insulting term – many popular sites and chat rooms won’t even allow the mention of such stocks.

The reason for this derogatory treatment of penny stocks is for the simple fact that they are quite easy to manipulate, especially if you get a big enough audience.  When a stock’s market cap is incredibly low (think microcap or less than $300 million; often much less), even a single investor or trader can have quite an impact on the stock’s price.  Big sites and popular chat rooms often have a large enough audience to have a few people bite on one fake tipster; the fake tipster buys the stock (this may take a week or more of accumulation, because the stocks are so thinly traded), then he tells everyone on the site, forum or chat room to buy it too.  ”It’s going to run” he’ll say, and if he can get enough people to buy it, it becomes a sell fulfilling prophecy.  When the stock makes some solid gains, the tipster sells his stock for a big profit, and the people who bought into the “run” are left holding the bag as the price sinks down to where it should be.  Since everyone wants to sell at this point, there’s no one there to take the “buy” side of the trade, and those who didn’t get out early are completely screwed.  You could get stuck in a losing position indefinitely.  This is called the “pump and dump” and it’s been around as long as the stock market.  It’s a fraudulent activity that the SEC will hammer you for, which is why reputable websites, chat rooms and forums squelch penny stock talk; they don’t want to get caught up in the SECs wrath.  It also distracts from the discussion of “real” stocks and other tradable securities.

However, there is a smarter way to day trade penny stocks.  This involves monitoring penny stocks for unusual activity.  This unusual activity can include press releases, newsletter mentions, and unusual volume and price movement, waiting for the “pump” to start to peter out, and then short the stock right back where it came from.  The great thing about this type of trade is that you’re selling at the top when people still might be trying to buy into the run; this means your orders are probably going to be filled.  Same goes for the ride down; there will be a lot of people looking to get out of that stock, and you’ll be able to play the “buy” side role.  Again, there will be no shortage of sellers for you to buy from.  The biggest problem you’re going to run into with this type of trading is finding a broker that has a large book of shortable stocks.  Many times you’ll find it difficult to find penny stocks that you’re broker is able to let you short, but if you’re patient, this can be a pretty decent way to make a buck or two.

I’ve never watched the DVD’s, but I believe this is the basic foundation the method of penny stock day trading used by Timothy Sykes from Profit.ly.  Penny stocks aren’t discussed a whole lot on this blog here, but Profit.ly is a great place  to learn about them.  Their newsletters cover them quite well.  Sykes is quite profitable and successful in the realm of day trading penny stocks, and he loves to teach, so you can be sure you’re getting a high quality education in day trading penny stocks over a Profit.ly.

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Many investors are often not aware just how profitable it can be to buy penny stocks with high growth potential. The opportunity for some large gains from these low priced stocks is available to traders who want to start with a really small investment. A lot of large companies have started out with low priced penny stocks and made some fortunes for many of their early investors. Keep in mind, however, when you’re dealing with new companies that haven’t become profitable yet the idea of investing in some low priced stock can mean there’s many risks along with potential rewards.

Any stock that is selling for less than $5 a share is what the Securities and Exchange Commission (SEC) generally considers a penny stock. You may also find here are others that define trading under $3, or less than one dollar per share as a penny stock. It really doesn’t matter which definition you end up using, a very low priced security is still called a penny stock. It is the lower price of these shares that provide the opportunity for an average investor to be a position of controlling a fairly large number of shares with a smaller investment.

Keep in mind that penny stocks are usually not going to be traded on the New York Stock Exchange. Most of the time they are usually on the Pink Sheets, or Over the Counter Bulletin Board (OTC), but there are also times when they can be located on the NASDAQ or other exchanges like the Toronto Stock Exchange (TSE) for penny stocks in Canada. Quite often you’ll discover information concerning these companies can be scarce, as well as unreliable. It might be possible to locate information on the internet, but that’s usually little more than promotional material the company or a stock guru has decided to release. It’s up to you to perform your own due diligence in gathering all the information you can about the company, its products, clients, market, as well as its financial basics.

Always keep in mind there’s a reason these stocks are inexpensive – the company could have experienced financial problems in the recent past, or just be new. Needless to say, the majority of these stocks won’t become big winners, and in most cases probably won’t rise about their status as penny stock, and may even fail eventually. There’s always a possibility some of the stocks could see gains of 50%, or even 5000%, and that’s the real hook for people who are investing in or day trading penny stocks.

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For understanding day trading penny stocks, you should have knowledge of the term day trading and penny stocks. Buying and selling of stocks, stock options, futures and other financial instruments within a day is called day trading. Generally, all positions are closed before the market closes for the day. The trader is free to buy and sell the shares within minutes or can even hold them for several hours.

Traders participating in day trading are called day traders. Formerly, day trading was not so common and was used by the investment firms or bank employees only. With the changing trends and advancements in technology, day trading has become very popular. Now people can even trade from their own homes.  These traders are generally referred to as retail day traders

Penny stocks can be defined as low priced shares of small firms. These companies have fewer equity and assets as compared to big firms. As shares have low value, so these are not generally involved in the major stocks of the country. There are several other services through which one can deal in penny stocks.

Day trading penny stock refers to trading or buying penny stocks within a particular trading day. Being cheaper in price, a new investor can try trading with penny stocks with minimal loss. One can earn huge profit in such stocks. Traders buy the shares when their price is low and sell them as the price rises. One can seek advice from professional traders about different strategies used by them during day trading.

One can make huge profits but high risks are involved in day trading penny stocks as well. Before making any kind of investment, you should research thoroughly about the firm through the net or other sources. It is not easy to resist highly attractive profits of stocks but these may lead to big losses as well. Lack of liquidity or change in demand can affect the share value to a great extent.

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