It is possible to trade penny stocks through individual retirement accounts, or IRAs. However, penny stocks are generally quite risky, so this investment choice should be made with caution. The Penny Stock Trading Challange offered by Timothy Sykes is a once-in-a-lifetime opportunity to learn about the ingredients that make for successful million dollar trade payoffs and a whole lot more.
In the most basic sense, a penny stock is any share that has a relatively low share price and offers equity shares in companies with relatively low market capitalization. For most people, penny stocks are literally shares that are bought and sold for pennies to the dollar. For others, a penny share is any stock that is priced at any price below $ 5. Penny stocks are also traded outside of the main stock exchange markets.
Penny stocks were common in the open-markets in the United States and became famous after the case of Jordan Belfort, who made millions negotiating such securities in markets that were not regulated by brokers signatures. This created a false expectation about the performance of these shares, promising exorbitant profits, causing investors to buy large volumes of these shares because their cost was very low. However these types of instruments, in addition to not being regulated, lacked liquidity, They were basically buying junk stocks.
Penny stocks are considered one of the highest risk and most speculative capital investments. Contributing to its high-risk classification is the fact that penny stocks often suffer from a serious lack of liquidity that results in very unfavorable supply and demand differentials. Penny stocks are subject to much fewer quotation requirements and regulatory standards, and it is often difficult to obtain sufficient and reliable information about penny stock companies so that an investor can properly evaluate the companies for investment purposes.
How to Invest in Penny Stocks?
There are usually few brokers that offer to operate in penny stock markets, which do so at very high commissions and with stock restrictions. Therefore, the most recommended and common way to operate this type of shares is through online brokers, which offer the online stock trading service.
Benefits and Risks of Investing in Penny Stocks
The main advantage of Penny Stocks is that they are stocks with values so low that any momentum in the price, even if it is not very large, can provide great surplus-value in a very short time. Sometimes, Penny Stocks have managed to double or triple their price on a single trading day.
So if we analyze a company, we understand the sector in which it operates and we see that they are performing coherent actions we might be able to detect a great investment opportunity.
However, the truth is that it is very difficult to detect these investment opportunities with penny stocks and the risks we face when investing in them are high.
In the first place, the greatest danger of investing in Penny Stocks is the lack of information and transparency about companies, which makes their analysis very complicated, which makes it very difficult to know what to invest in and when to do it.
In addition, this lack of transparency makes it possible to reach the manipulation of prices or information, which could be detrimental to small investors.
Finally, we do not have to forget that by having so little liquidity, we can get caught in a price almost without compensation, even if we are in profits it is likely that it will cost us to sell our shares with a good margin.
In summary, a penny stock is not a recommended action for anyone, but for those investors who are knowledgeable in the field who know and assume the risks involved in investing in shares of low market capitalization and low liquidity. If you still want to invest in this type of action, experts recommend that the investment does not exceed 5% of your total assets for financial investments and, above all, always consider a disciplined stop-loss strategy.
How are Penny Stock prices manipulated?
Taking advantage of the lack of information and low levels of liquidity, many companies are dedicated to buying large amounts of shares of these companies at prices that are thrown on the ground to subsequently send emails indiscriminately to retail investors in a database-wide, as well as calling investors to tell them that they have insider information and that the company is going to shoot in the short term.
What they do is sell those shares 300 or 500 percent more expensive, executing the “inflate and knockdown” strategy, which is completely legal, since you have really only sold something that is yours to a buyer who has been willing to Pay for it the price you have requested. The problem is that the buyer will not be able to sell his shares because there are no buyers unless he sells them with 50 or 75 percent cheaper.
Therefore, when in a financial newsletter you find very positive news about a penny stock, there is a high probability that this news has been paid by the company itself or a brokerage house that owns shares of that company.
False beliefs of Penny Stocks
Many investors are attracted to these shares that are priced at $ 0.0003, as they think they have much more space and travel for high valuations. Keep in mind that at $ 600 we could buy 2 million shares, so if that company ever reached only $ 0.1, we would earn $ 200,000. We are not going to say that this has not happened, but for every case of people who have become millionaires in the OTCMarkets, there are 1,000 cases of investors who have lost even the shirt in the purchase of these shares.
The other false belief in which I fell was to think that companies like Apple and Microsoft had been a penny stock at the beginning. It is an argument used by scammers to sell you these shares because although we see in the historical price of these companies trading at $ 0.09, the truth is that they went public at a much higher price.
The Penny Stocks Trading Challenge by Tim Sykes helps you learn more about how penny stocks work and how you can turn a small investment into big returns.