What Are Penny Stocks?

What are penny stocks and how do you buy them? What is the definition of penny stocks? Penny stocks are simply stocks that trade under $5 and are traded outside of the major indexes, (NASDAQ, DOW JONES, etc)

Trading Penny Stocks, is it a good idea?

Everyone is looking for the best way to make money with penny stocks. After all the idea is simple, you just buy a stock for $.10 and hang onto it until it goes to $20, easy right? Unfortunately sometimes the get rich quick schemes aren’t exactly the best way to go.

Normally it is a wise idea to avoid penny stocks; after all they are penny stocks for a reason. But every now and then it can be pretty profitable to buy a penny stock that you believe will go up, provided you use proper money management and only risk what you can afford to lose.

If you want to start trading penny stocks do so at your own risk. The rewards can be huge, but the risk is also huge. As I already said penny stocks are penny stocks for a reason, it is very unlikely that they will turn around if they have already gotten that low.

Where to buy Penny Stocks

Now that you know, what are penny stocks, let’s look at how to buy them. You can buy penny stocks in any traditional brokerage account, but more notable it is better to buy them with one of the penny stock brokers who do not cost an arm and a leg to use. Otherwise the commissions will eat up your profits if you are buying a stock that is trading at such low prices.

Get Rich Quick Schemes

This is a market saturated with Get Rich Quick Schemes. Don’t believe them! Most of the people around the web who advertise getting into “hot penny stocks” are only trying to sell you something that doesn’t work over the long term.

Another more common scam is called the pump and dump scam. In this scam “professionals” will send out regular newsletters listing penny stocks that will go up in the short term. The idea here is to buy the stock themselves and then convince enough other people to buy the stock so that it forces it to go up.

Because penny stocks have such low trading volume (because professionals and “big” money tend to stay away from them) they are able to affect the price of the stock with just a few thousand people buying it at once.

It is a sickening scam because the newsletter writers tend to get out of the stock at the high leaving the people who they convinced to buy it scrambling to get out as the stock crashes.

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