Trading Penny Stocks

Penny stocks, so called because their prices are generally under $1.00, can have huge short term potential. Their cheapness plus volatility makes for big percentage swings that many traders like to take advantage of. Because they are so low in price, a trader can buy a large number of these penny stocks and wait for them to hit it big, thus creating a big payday.

There are a few things to beware of with penny stocks

The first of these is that because of their high volatility, they are more apt to go bankrupt than other better established companies are. There’s a reason why their stock is so cheaply priced—they do not have the same net worth as bigger blue chip companies. This creates a larger risk for you because they don’t need to fall as quickly in price in order to lose everything. Beware of penny stocks with poor fundamentals because of this. You don’t want to put a lot of money into these stocks only to lose it all. Just like in Forex Arbitrage there is a place for everything when it comes to trading.

The second thing to look out for is that you cannot sell short penny stocks. Because they are so apt to go down in price, federal laws prevent traders from selling stocks short when they are below a certain price. This law is in effect in order to protect these companies from nay-saying traders looking to capitalize off of a company that is about to go bankrupt. If you wish to short stocks, you will need to look at larger companies.