Penny Stock Questions

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Here are some of the most asked questions. If you have a question you don’t see the answer to please ask at info@otcstockexchange.com.

What are penny stocks?
According to the US Securities and Exchange Commission the term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. Most traders consider stocks trading below $1 to be a penny stock.

Where do penny stocks trade?
Most penny stocks generally are quoted over-the-counter, such as on the OTCBB or OTC Markets however some do trade on securities exchanges such as the NYSE, AMEX or foreign exchanges.

How should I trade penny stocks?
This is really personal preference based on your skills and objectives however, in our opinion; the overwhelming majority of investors that trade penny stocks profitably are short-term traders.

What is a short-term trading strategy?
Short term trading is when you look to enter and exit your position in minutes, hours, days or maybe a few weeks. According to the tax code short term trading is entering and exiting within six months. Most profitable penny stock traders fall into this category. When trading short term you are not concerned with the long term potential of a company only if you can take advantage of short term price gains to put profits in your account.

Can I make money with a buy and hold strategy?
Sure you could. There have been companies that once traded below a dollar that went on to reach highs of $50, $100, or even higher. These however, are few and far between. If this is your goal you need to wear a different hat. You need to become a detective and spend lots of time researching companies, markets, and managements. Even after all that you will need to catch many breaks along the way. We are not trying to discourage you, just make sure you go in with both eyes wide open.

How to get started?
The first thing you need to do is become as educated as you can. Read everything you can on the subject of penny stocks and trading. Do not be in a rush to trade just for the sake of trading. There will be penny stocks 100 years from now so don’t think you need to jump in so you don’t miss a trade.

What type of broker should I use?
There are a couple types of brokers.
Traditional brokers (Edward D Jones, Merril Lynch, Ameriprise to name a few) These brokers usually recommend products or services, charge much larger fees and typically have no online trading platform. These brokers offer a valuable service to many but should not be your choice if you decide to trade penny stocks. Stock prices can move so quickly that by the time you get one of these guys on the phone and let them know what you are looking to do it could be too late. Stick with these guys when it comes to financial planning, managed money, advise on mutual funds, retirement accounts and things like that.

Online brokers- (ChoiceTrade, Scottrade,Etrade, Schwab and others)

An online broker is recommended for trading penny stocks. Online brokers allow quick access through their trading platforms and have cheap fees. Most online brokers will open accounts with a $500-$1000 deposit. Once the account is open you can trade with as much or little of your funds as you like.

Where can I open an account?
List online brokers

What do you need to get started?
Risk capital and desire. Make sure this is risk capital. Most new traders make rookie mistakes that cause them to lose until they get the ropes.

How much money do you need to trade penny stocks?
$500-$1000 is usually the minimum to open an account.

Can I lose a lot of money?
You can lose your whole investment. Never invest money you cannot afford to lose. With proper money management techniques you can learn to keep losses to a minimum though.

Can I lose more money than I invest?
Not if you are long the stock. If you do decide to short stocks you can lose more money than you invest.

Why do penny stock prices change so much?
OTC stocks are affected by herd mentality. Investors are either rushing to get in or rushing to get out and because of this less liquid stocks are subject to wild price swings. (Understanding this is the key to trading penny stocks profitably)

How often can I trade penny stocks?
If you have $25,000 on deposit you can buy and sell as often as you like. You are considered a day trader. If you have less than 25,000 on deposit you can buy and sell but can not enter a new position until your first trade settles three days later. (T+3= Trade plus three days)

Are penny stocks a good way to start investing?
Most investment professionals would recommend that you take care of all your long-term investment needs such as retirement and education funds for the kids before you think about penny stocks.

I am out of work, Can I earn a living trading penny stocks?
While technically possible the odds are stacked against you. Please do not try. Keep what funds you have safe and secure.

What is going long vs going short?
Going long means you buy the stock first with the goal of selling it at a higher price in the future. The difference between the purchase price and sale price less your commission is your profit.

Going short means selling the stock first with the goal of buying it at cheaper price in the future.

The goal to buy low and sell high is the same, the steps are just reversed.

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