penny stock traderCommon convention says that penny stocks are stocks which cost less than $5 per share. Unsurprisingly, given the lucrative rewards investing in penny stocks can bring and the ease at which you can buy them, they are now more popular than ever, but only a small percentage of traders are really making a killing trading these unpredictable stocks.

Penny Stocks Are Either Companies With a Negligible Income Or Are Financially Distressed

Penny stocks are either companies that have negligible income or are financially distressed companies which are in the dying stages unless an institutional investor can be found to take them over. Given the high amount of uncertainty surrounding these shares it is vitally important that you know how to go about researching and investing in the a hot penny stocks.

Reasearch The Company Background

penny stoc kresearchNaturally the first thing you should do when youve come across a good penny stock is to find out as much as you can about the company. Ideally you should have a good idea of the industry it is operating in such as whether its a growing, stagnated or declining sector and who the competition is. Finding out about any company in this day and age is an absolute breeze with the Internet. You can find out who runs the company, do profile checks on all the directors, look up patents, research the competition and refer to industry blogs to get a feel for the market demand. You might even be able to connect directly with the owners via LinkedIn or Facebook.

Alarming Signs

alarmIf you cant find any information on the company or people that run it then it should start sounding alarm bells. Similarly, if a company is waiting on some legislation like a mining license or patent agreement and there is no way to find the status of this then its a very high risk penny stock.

Have A Look At Online Forums And Blogs

Secondly, you should find out what the chatter is in the online forums and blogs. Are other people discussing the penny stock? What are they saying about it? A penny stock which no one is discussing is a bad sign but at the same time a penny stock which everyone is talking and getting excited about could also be a warning sign as its being ramped up by the retail investors and the share price could be higher than its actually worth. Small stock bubbles can easily be created in the penny stocks market where volumes and prices are low.

Look For A Penny Stock Broker

penny stock brokerThirdly, you should look for a broker that is specialized in the business of buying and selling penny stocks. Many offline and even some online penny stock brokers wont let you trade certain shares over the counter, while others will charge a hefty fee for letting you do so. Some brokers like E*Trade tend to do a good job of letting investors trade obscure penny stocks but take in to account the commission fees can eat in to your profits when you come to sell the shares.

Low Volatility

Low VolatilityFinally, you need to understand how many penny stocks are actually traded. Most of them are not listed in a major exchange like the NASDAQ  or DOWJONES and are traded over the counter. This means that the companies often dont have the same financial reporting and ownership disclosure that companies listed on the major exchanges have. It also makes it harder to buy and sell as the market has a low volatility. Even if the penny stock goes up, there has to be a buyer that is prepared to pay the higher price in order for you to sell the penny stock. If no one is prepared to pay then you are stuck with the shares until the price comes down to a level investors are prepared to pay. Infact, some brokers will only allow you to enter limit orders and won’t guarantee to buy at a particular price.
Keeping the above points in mind will help make you a better penny stock trader and help you make more informed and successful decisions and ultimately turn a profit.

Although I highly recommend certain penny stock alert services, you should still do your homework and reasearch the companies recommended in the newsletter alerts yourself as well!

Recommended Penny Stock Alert Services:

1. Penny Stock Psychic
2. Penny Stock Finders
3. Penny Stock Formula
4. Penny Stock Scientist