Penny Stocks

Penny Stock Basics

Investing is something that many people are interested in. They want to see how much their money can grow for them and some even want to see if they can make this a full-time job. There is a variety of investments that you are able to make. Some people keep it safe and place their money in a savings account while others go with a retirement plan. Some will go with real estate and choose one of those options when the market is good and others like to start their own business, get into the Stock market, or invest in a friend who is doing something new. The options can be endless when it comes to starting a new investment, and picking out the right one for you can be the hardest part of getting started.

One investment type that you may want to try is the Penny Stock. This is a type of Stock that starts out really low, at no more than $1 for each of the shares. According to the Securities and Exchange Commission in the United States, a Penny Stock is one that will trade at no more than $5 a share, but most of them will be much less than that.

A Penny Stock can bring about a huge profit to those who know how to use it, but it is not a popular option as it works off the regular Stock market and is often used when a company is really desperate for some money. There is the potential for large losses, even if you make the purchase at a small rate, but if you are able to read the market, there is the potential to see a great deal and make a good profit in the process.

One of the best ways to ensure that you aren’t taking a big loss on these Stocks is to be careful who you purchase from. There are some unscrupulous people who will make a big purchase of Penny Stocks in order to help raise the price. They will use fake press releases, websites, Stock message boards and more to talk up the Penny Stock price so more people will make a purchase, and then the price goes up even more. Then they sell the Stocks at the inflated price, making themselves a lot of money while everyone else will not be able to find any buyers and will either have to hold onto the Stock or sell it at a loss.

The good news is that the Penny Stock does need to meet some standards in order to prevent the process above, which is known as ‘pump and dump’. In United States, these Stocks need to have a price, market capitalization, and minimum shareholder equity. Remember that even if the Stock you are looking at is below $5, it will not be a Penny Stock unless it is traded off of the Stock Exchange.


The Good Things About Penny Stocks

We spent a little time talking about some of the things that you will need to avoid when trading Penny Stocks and looking to invest in these opportunities. If you are careful about watching the market and seeing what is going on before you make a purchase, you should be able to figure out when a pump and dump scheme is going on. If something looks like it is rising in price too quickly, you see that there was only one buyer of a large amount of Penny Stocks with just one company, or you feel like this person is really trying to pressure someone into making a purchase that doesn’t look like the best, it is a good idea to go with a different option for the Penny Stocks.

The good news is that you are able to do well in Penny Stocks; you just have to keep your head and make sure that you aren’t trying to rush into something that doesn’t make sense for you, or that has a lot of red flags all over it. One of the best ways to get the most out of your Penny Stocks is to learn how to do your research before making any purchases.

There are many things that you will be able to research about a Penny Stock before you get started. For example, start by looking at the corporate website for the company you want to work with. this provides you with a good idea about the company because a lot of information can be there. You should then look at the Balance Sheet of the company to see how many debts the company is dealing with; if there are too many debts, the company may be trying to sell the Penny Stocks to get out of debt, but if they haven’t learned how to control that debt, throwing more money over to them will not help. You want to pick Penny Stocks out from companies that are profitable or the ones who are able to properly reduce their losses and will not take on large amounts of debt to keep running.

Penny Stocks can be a great form of investing if you are looking to get started with an option or you want to expand out your portfolio out to make your money work a little harder. We are going to take a look at more parts about Penny Stocks and how you will be able to make them to work for you.

So, before we get into some of the basics of trading in Penny Stocks, we need to take some time to understand the different methods that companies can list themselves in this kind of market. Remember that while there are rules for Penny Stocks, they are not considered part of the Stock market so working with them is going to be a bit different than what you are used to. Here we are going to talk about how a company is able to list in Pink Sheets and what this means for you as an investor.


Listing in Pink Sheets

For a company to get started with Penny Stocks, they will first need to file the Form 211 in order to be listed in Pink Sheets. This is a privately held corporation, compared to the other option (which we will talk about later) over-the-counter Bulletin Board, which is a service that is owned by the NASDAQ. There are many companies that use Pink Sheets to work with and when they fill out the Form 211, they will need to submit it over to the OTC Compliance Unit. The market maker is going to process the listing for the company. The broker and dealer will be able to quote a price for this company, as long as the company is pretty transparent. However, there are some companies that won’t commit to this transparency because they won’t submit their current information on business financials.

For the companies that are listed using the Pink Sheets, you will find that they are often small setup. This company will not have to work with the SEC during the trading time and they don’t have to file their periodic reports. Now some of them will do this filing in order to show what they are doing and to help the investor feel more comfortable investing in them, but this is not mandatory. In many cases, it can be difficult to get information in order to understand companies that are on the Pink Sheets because you just don’t have the information that is needed to get started.


The Benefits of Trading Pink Sheets

Despite the fact that the companies who use Pink Sheets are not required to be transparent or file periodic updates, an investor is usually going to find some pretty good options to trade in Penny Stocks with these Pink Sheets. You have the possibility of getting a high return because these are the Stocks that are volatile. There are also some companies that are in this group that used to be strong, but for some reason or another had to leave the major exchanges because of a strict requirement they no longer met. They may still be good companies to trade with and you could make some good profits from it.

It is also possible to find obscure companies to trade with in order to help that company grow before they move over to one of the major exchanges. You would be able to invest with these companies early on and this could give you a huge reward later as they start to grow and move over to the Stock Exchange.

In addition, the Pink Sheets system has a tier system that helps you to differentiate between the companies that are there. This helps you to figure out which Stocks are higher risk and which ones are lower risk based on the classifications that are set. You are able to pick whichever risk setting that you are happy and comfortable with, but as a beginner, it is nice to know which ones fall into each category to help you make a decision.

If you want to use the Pink Sheets as part of your trading strategy, you need to make sure that you really do your research. Pink Sheets is not going to provide you with much information about the companies you are trading with and if you just randomly pick a company, you are increasing your risk and making it likely that you will lose all of your money.


The Classifications System

As mentioned before, the Pink Sheets system has a classification for each of the companies that trade using it. This makes it easier to determine whether a company is high risk or low risk and you can make your decisions based on this. Some of the tiers that are found inside of the classification system include:


Trusted Tier

Inside the trusted tier in Pink Sheets, you will find the international as well as American companies that are considered trustworthy and investor friendly. The companies that are from other countries are going to be on the international exchange, but they can still fit into this trusted tier. The companies that are in this tier have not met the requirements to be on the regular Stock Exchange, but this is usually because of one or two small issues since the Stock Exchange is so strict.

However, even though these companies were not able to get onto the Stock Exchange, they were able to pass an independent audit. This list sometimes does include companies in American that pass the standards needed for NASDAQ but they aren’t submitting SEC reports and so they would be moved over to Pink Sheets instead.


Transparent Tier

This is a tier that will send in SEC reports and sometimes will also include those that are in Over-the-Counter Bulletin Boards. These are highly trusted companies because you will be able to see some of their financial reports as well as other information that is required for them to be good with the SEC. You will be able to do your research on these companies because it is provided to you and can save a lot of guesswork and hassle when choosing the Penny Stocks you want to work with.


Distressed Tier

Companies that are inside of this tier of Pink Sheets are ones that provide limited information for the investor to look at and often they are not following the guidelines that are set out by Pink Sheets. These companies may not even send out updated information to the SEC like they should, but some them will work with the OTC disclosures. Not all of these are bad to work with, but sometimes you need to be wary because they aren’t sending out the right information and some of them have gone bankrupt.


Dark Tier

This is the tier that you will really need to watch out for because it could cause some issues. Companies that are inside of this particular tier aren’t sending in any information about their business. They aren’t filing information with either the SEC or the OTC Disclosure service and they haven’t done so over at least the last six months, making it really hard for the investor to have any idea how this Stock is doing. There are some companies that get into this tier that are also failing with transparency in the market or they don’t have a market marker.


Toxic Tier

As a new investor or any investor for that matter, it is best to stay out of the toxic tier. Companies that are in this tier will often rely on marketing strategies that are fraudulent such as using promotions that are questionable or sending out a lot of spam to name a few. These can also include some companies that are subjected to large corporate events that disrupt them or they may have a suspension by the government. In some cases, these will not actually have their own business operations and can be really dangerous to send your money to.

Taking a look at these different types of tiers inside this system can help you to make a more informed choice when it comes to working the Pink Sheets. You will be able to see these rankings with any of the companies that you choose to go with and if you pick the one with the highest reputation, it becomes easier to get good returns on investments.


How to Make Decisions in Pink Sheets

So now that we know a bit more about Pink Sheets and how they work, it is time to learn how to make trading decisions. When picking a Penny Stock that is inside of Pink Sheets, you are going to be limited on information and technical analysis of most of the companies. There are also some issues on occasion because there isn’t a central exchange that you can use to buy and trade these Stocks. This is why it is best to start out with a broker and dealer who will be able to walk you through this process.

As the investor, you will need to do a fundamental analysis of any company that you want to invest in, even if they are not sending the information your way. You can look at the different companies and their past history and you can look to see if there are some hidden gems that other people will miss out on right now, but which will make the Stock better later on. With some good research, you will quickly be able to narrow down the choices that you want to use.

Working with Pink Sheets can be one way to get started on Penny Stocks, but you do need to be careful. Some of the companies are great and will provide you with information to pick them; many of these are working to get to the Stock Exchange, but for some small reason or another, they are not quite there yet and these are pretty safe options to go with. But there are also companies on the Pink Sheets that won’t provide any information and some that are even fraudulent, so you need to be careful about the companies that you invest in to help keep your portfolio strong and growing.


Investing with OTC Bulletin Boards

Another option that you can choose to invest for your Penny Stocks is the Over-the-Counter Bulletin Boards or the OTC Boards. This one, at least inside of the United States, is operated through the Financial Industry Regulatory Authority and it will hold many of the Stocks and securities that are not found on the NASDAQ or other Stock Exchanges. You will need to work with brokers and dealers in order to buy or sell the Penny Stocks since this is not an electronic method, and it can be pretty secure to work with.

This type of Penny Stock is usually seen as a little more secure because they are required to send in financial information and to be transparent. It is regulated a bit more and often the companies that are on this one will be here because they didn’t meet some small requirement to be on the exchange. All of the companies that are listed on these bulletin boards will need to report their information to the SEC, but they don’t have to include as much information as they would on the Stock Exchange and they can leave our information on their market capitalization, minimum share price, governance, and more.

These are usually seen as a bit more secure because of the fact that these companies have to send in information and report to the SEC while the companies on the Pink Sheets could do this reporting, but they didn’t have to. Many beginners in Penny Stocks will choose to go with this option because it allows them to learn a bit more about the company that they want to invest in, making it easier to pick a smart investment on their end.

Both the OTC Bulletin Boards and the Pink Sheets can be great places to start in order to find the Penny Stock that you want to invest in. Some of the options can be a bit risky, but as a good investor, it is up to you to step in and do the research to find this information out. You are going to find risky investments no matter where you are, whether on or off the Stock market or in other forms of investing, but you need to find the one that works the best for you and has the right risk-to-reward ratio that you are comfortable with. Both of these trading methods have their own systems to help you to make these decisions and if you are working with a broker or a dealer, you should have the support that you need to make the right decisions.