Penny Stocks Profits - The Why

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					Penny Stocks Profits - The Why, Where and How of Successfully Trading
Penny Stocks
Why do people trade penny stocks? They are highly volatile. They're
difficult to research since the history of the company may be scant. They
are highly speculative. They move with the speed of light. There are
dangers of stock manipulation and gruesome incidences of shameless hype
and untruth. And furthermore, they aren't even required to submit to SEC
And yet, with all those negatives, in 2006, the average daily dollar
volume of shares traded on the OTCBB was $202 million. That figure is up
from $186 million in the previous year. Average daily share volume rose
to 2.6 billion in 2006, which is up from 1.7 billion in 2005. (Did you
notice that is billion with a B? Did you notice that was daily?)
Why? Why this phenomenal growth?
1. Of course the first reason is the price. Cheap cheap cheap. Such an
easy way for the small, unskilled investor to get his or her feet wet in
stock market investing. With penny stocks, the basics can be learned with
very little risk.
2. Technology - the Internet - has made an incredible impact on day
trading penny stocks. There so much information out there, ways to
research both what to trade and how to trade.
3. Some people truly do have valid inside information regarding a company
where they might be employed (or where a relative is employed), and they
are privy to the possibility of that company really taking off.
4. The atmosphere of volatility and unpredictability, rather than
speaking danger, speaks fun and excitement to some. They like it because
of the high risks and the wild rides.
5. The majority of people flat out want to make a boatload of money and
they see profiting with penny stocks as a way to do that
If you're still wondering if this arena of investing is for you, consider
these criteria:
1. Know and understand your own risk tolerance.
2. Ascertain your financial and investment position.
3. Gage the aggressiveness of your trading goals.
4. Line out your reasonable expectations of returns.
5. Take into consideration your level of trading experience.
Where To Locate Penny Stocks
If you have low risk tolerance, begin with Nasdaq SmallCap Market. This
market is for securities of smaller, less-capitalized companies (small
caps) that do not qualify for inclusion in the Nasdaq National Market,
and yet these companies must follow strict compliance to maintain their
listing. The investor will have access to the company's financial results
and ongoing reports. Few of these stocks will be less than a dollar a
The OTCBB (Over The Counter Bulletin Board) provides some regulation and
accountability. An OTCBB equity security is any equity that is not listed
or traded on the Nasdaq or a national securities exchange. The OTCBB
provides access to more than 3,600 securities. It includes more than 330
Market Makers. The system electronically transmits real-time quote, price
and volume information.
AMEX (The American Stock Exchange) also trades penny stocks. The shares
here may have less volume, but there are reporting requirements, along
with many news and quote services.
Pink Sheets. You see both warnings against, and enthusiasts for, stocks
presented through Pink Sheets, LLC. They trade with no reporting
requirements or regulations, and trading activities tend to be low and
sporadic. Beginners probably should not start here.
How to Start - Try Paper Trading Penny Stocks
One way many investors get started is to paper trade. Essentially, it is
pretend trading (or simulated trading, if you will) to give you the feel
of the real thing. Pre-technology traders painstakingly drew chart after
chart to accomplish paper trading. They were a dedicated lot. But with
the internet, it's a breeze. There are many sites that provide this
service for free. You can trade with all your Monopoly money and see if
you can really do it.
Paper trading allows you to chose and monitor stocks, and decide on your
entrance and exit points with absolutely no risk involved. It's a great
way to test an existing investment strategy or information source. You
can get the feel for the best quotes, charts, news sources and tracking.
The best advice for paper trading is remain realistic. Try to paper trade
the same way you would if you were really beginning to invest. Use the
same size of investment capital. Use the same entrance and exit
strategies. Use the same goals.
You will need to keep extensive notes throughout the paper trading
activities. You'll want to look back and see what worked best for you.
For all its merits, there are still a few drawbacks in paper trading.
When trading for real, you'll know the exact price you paid for the
shares because you'll have a price receipt. With paper trading you don't
have that information. You can only take a number like the day's average
price, or the opening price. Also pay attention to limit orders. You
can't actually trigger a limit order with paper trading. So you'll have
to watch to see if it hit your target price.
The biggest difference between paper trading penny stocks and real live
trading is your emotions. Believe me, you can be cool as the proverbial
cucumber while paper trading and fall to pieces when your hard-earned
cash is on the line. While you are paper trading, none of the greed,
panic, anger, or impatience will bother you. But it can hit you right
between the eyes when real money is on the table. That's why you must
know your own risk tolerance.
If you begin in safe territory and graduate to bigger things, you'll
maintain your capital and your sanity.
Please look for my companion articles to learn even more important facts
about investing in and profiting from penny stocks.
I've been dabbling in penny stocks for a few years, educating myself in
bits and pieces. The other day I got a call from one of my old frat
brothers saying he too was researching penny stocks online. In his
search, he ran across a crazy story about two geeks who have created a
computer robot that does all the analysis work. They locked themselves in
a room with 12 computers all running at once to test the system. (Shades
of college-age Bill Gates.) The results are staggering. Winning picks
right and left. See what you think. These two guys are so sold on their
product they are giving people $100 trading cash! (Oh yeah, they named
the robot, Marl!)