Why Penny Stocks are Popular and How to Buy Penny Stocks
Why are penny stocks so popular, especially among new investors or investors with a moderate level of cash to invest?
One reason why these types of stocks are so popular today is because they represent a chance to own what seems like a significant number of shares in a company for a relatively low price.
Penny stocks have experienced a steady flow of investing and trading, as the market has advanced since the end of the October 2014 stock market correction.
Today, many individual investors see unlimited upside potential when trading penny stocks.
The perception is that the US economy continues to surge ahead and unemployment is on a downward trend.
As reported by the US Commerce Department, “the US economy grew at an annual rate of 5% in the third quarter, its fastest pace in the last 11 years”.
So what are the best tips on how to buy penny stocks?
The truth is that there are a wide range of strategies and options for you on how to buy penny stocks.
One mistake that a lot of investors make is to immediately jump in and start buying up penny stocks, without actually knowing what strategy to use.
What You Need to Know When Buying Penny Stocks
The first thing to keep in mind, before we continue, is that penny stocks are inherently very risky.
Just because an individual share might be priced low doesn’t mean that you can’t lose a lot of money if you invest largely in a company.
Before buying a penny stock, you need to conduct a detailed analysis of the company to determine if it has any growth potential.
A lot of individual investors buy and sell penny stocks without doing enough detailed research.
They read about a story on CNBC or some other financial news site about a low priced stock and they immediately buy the stock.
Image source: CNBC
Or they might hear or read in the news that a penny stock has been surging for the last couple of days and they immediately jump in (after little to no research on the stock) with the hope of making a killing and with the expectation that the stock will continue to surge.
In a lot of cases when a penny stock surges, it is because the company has announced that it is either being acquired or it is experiencing a revenue surge.
When such an announcement is made, investors normally rush in and start buying up the company’s shares.
Your goal is to identity such growth before the company makes such an announcement.
In addition, when considering how to buy penny stocks, it is essential that you stay within your risk threshold, and be sure to understand your strategy for selling the penny stock if it begins to go south.
Penny stocks have the tendency of being difficult to sell once purchased, because they tend to be an investment in a low profile company that not many other buyers are interested in investing in.
Below are six ways you can invest in a penny stock
DSPP
Consider buying the stock directly from the company rather than through a broker. This cuts out the “middle man” broker fees.
The best way to buy a stock directly is through the Direct Stock Purchase Plan (DSPP). A lot of investors do not know about DSPP. As such it is often overlooked when it comes to stock investing or trading.
A DSPP can be a way to buy certain very low priced shares without having to deal with the commissions and fees charged by a brokerage.
You can always contact a company offering a penny stock you’re interested in to see if they have a direct purchase plan. However, you’ll need to exercise extreme caution when dealing with relatively unknown companies. This is an arena where a great deal of misleading, fraud and loss occurs.
When learning how to buy penny stocks as a beginner, DSPP could be an option best avoided until you understand a great deal about investing, penny stocks, financial regulations and the company you’re considering investing in.
Use an Online Discount Broker to Buy Penny Stocks
Online discount brokerages are currently one of the most popular ways for people to buy penny stocks.
Image source: Freeimages
Most people who choose to invest in penny stocks are new investors looking for an affordable way to enter the stock market.
Discount brokerages might provide them with this.
Look for a discount broker that charges low fees if you want to buy penny stocks. Most of these companies will offer tutorials on their websites about how to buy penny stocks.
Traditional Stock Brokerages
Traditional stock brokers will occasionally buy penny stocks on behalf of their clients.
But most traditional stock brokers strongly advise against the purchasing of these types of shares because of their high volatility.
Another reason most traditional brokers don’t opt for this type of stock is the constant management they require.
Most of the profit made in penny stocks is by people who trade very carefully, watching for trends and patterns in order to try and extract the profit out of a transaction. The difficulty that some encounter trying to sell them provides another roadblock to potential profits.
The SEC actually requires traditional brokerages to make a disclosure to customers before they purchase penny stocks for them.
One of the main reasons this is required is that the SEC has not judged the merits of a given penny stock the way they analyze the actions of other publicly traded companies.
Penny Stock Mutual Funds
Although most mutual funds invest in bonds, regular stocks or other more typical instruments, there are some that specialize in lower valued stocks.
However, because penny stocks aren’t traded on open stock exchanges they are generally not included in mutual funds.
Nevertheless, as mentioned above, there are some funds which deal in very low-value stocks which might provide a very affordable entry point to owning the next-best thing to penny stocks across a diversified portfolio.
Margin Accounts
Using margin to buy penny stocks is not always possible. Federal regulations and the rules that govern your specific margin account will determine whether or not you can make the purchase of a given share on margin. Some which fall into the high-range of penny stock pricing and are traded on an exchange may be an option for purchasing in margin, again depending on the regulations of your brokerage.
Buying on margin means that you borrow money from the brokerage that you are working with.
You use that money to invest in a given company. Because of the uncertainty that comes from investing in penny stocks, you need to use extra caution when investing in them on margin, and be aware that you may end up owing money rather than earning it.
Special Agreements
When learning how to buy penny stocks, you’ll find that there are less options for purchasing these shares than many more traditional financial products.
This is because most penny stocks aren’t traded on the traditional stock exchanges. Instead, you’re going to have to make a special request of your brokerage in order to make the purchase.
Part of the reason for this is again because of the risk that most brokers see in the penny stock market.
They will want to, and are required by law to verify that you are sure that you want to put your money into such a high risk proposition before they make the purchase for you.
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