The best part of investing in penny stocks consists of the fixed amount of risk you need to take upfront to purchase the stock and the risk-reward ratio of the investment. Buying cents per share might seem risky since many stocks trading at that level are on their way to oblivion. Returns can grow quickly if the stock ultimately begins to climb.
Also, by acquiring a block of stock at such a low price, you always know just where you stand with the risk involved since the lowest the stock can go is $0 and that isn’t far away.
Overview: Stocks Under 10 Cents
Once you’ve decided to put some money at risk, research the penny stock market for companies with recent news and interesting products or services. Keep in mind that these stocks have an extremely speculative nature, so as a rule of thumb, don’t put any money at risk you can’t afford to lose.
Because of listing requirements, most penny stocks do not trade on the NASDAQ or other major exchanges, unless the company’s exchange-traded stock has recently failed to meet listing requirements. Trading in these assets is mostly done through the over-the-counter bulletin board (OTCBB). Quotes for penny stocks have traditionally been listed in the “pink sheets,” a quotation publisher that originally published the quotes on pink-colored paper.
Keep in mind that due to the nature of these stocks, spreads can be wide with a minimum trading block of 10,000 or 100,000 shares in many cases, depending on the stock and the broker. Despite all the risks, the rewards can be considerable, with 1-day returns in the hundreds of percent in some cases.
Best Online Brokers for Stocks Under 10 Cents
Many online brokers accept orders for stocks under 10 cents. However, be aware that most brokers charge commission for OTC bulletin board stock trades. Interactive Brokers offers Pink Sheet and OTCBB trading for selected stocks in its standard stock trading account and charges a fixed and a tiered rate.
Other online brokers that offer penny stock trading include TD Ameritrade, Charles Schwab Corp., ChoiceTrade, TradeStation and Zacks Trade. Commissions vary for each broker, from no-commission to $0.01 per share. Some brokers tack on a surcharge while others have a share quantity minimum depending on the stock. Call your broker for more details on penny stock trading.
Features to Look for in Stocks Under 10 Cents
- Product and potential future earnings: Due to the minimum listing standards, many penny stocks might be hard to research. Research your potential purchases as much as possible so you know you’re investing in a real company with a viable product or service. You’ll also make sure there’s potential for decent future earnings per share. Keep in mind that the penny stock market is rife with scams, so learn to avoid them.
- Assets and liabilities: Study the company’s financials for assets and other tangibles that might make the stock an asset play, which means that stockholders might benefit from a liquidation of the company’s assets. If the company is laden with liabilities, stockholders may not be entitled to the proceeds of the sale of company assets.
- Liquidity: Because of their low price and speculative nature, penny stocks could be hard to sell once you’ve acquired a relatively large position. Liquidating a large position in an illiquid market could wind up costing you most of your profits. Dealing in penny stocks with an active and deep market seems best if you plan on taking large positions.
Should You Invest in Penny Stocks?
The answer to this question depends on your goals as an investor or speculator and your pain threshold when it comes to risk tolerance. The first and foremost consideration before jumping into the penny stock market is if you can afford to lose your entire investment.
If you answered “no,” you’d probably be better off buying the stock of more established companies such as stocks under $20, stocks under $10 and stocks under $5 that meet your needs. With that said, profits from penny stocks can significantly surpass gains in other investments if you pick the right stock to buy.
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