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Penny Stock Trading And Investing Basics

Any stocks that are priced at $5 per share or lower are more commonly known as penny stocks. Most financial advisors and investors tell you to avoid them because the overall consensus is that they tend to be overly risky. Granted, there are some penny stocks that have realized some amazing gains within a matter of several hours or a couple of days. However, they can disappear just as quickly.

One of the downsides with these types of stocks is that they have the tendency to fluctuate erratically in price. When stocks are trading as low as what these do, this is usually an indication of one of the following:

• the company is in extremely poor financial shape

• the company is new to the market and is in need of more capital

• the company is on the verge of declaring bankruptcy

As a result, many financial advisors and investors will advise you to avoid investing in and trading these particular stocks.

5 Tips for Investing in and Trading Penny Stocks If you are considering investing in or trading these types of stocks, consider the following tips before you get started:

Tip #1: Do your homework first

• you should always find out as much as you can about any stock, but that is especially true with penny stocks. Yes, you may get lucky and pick a good one, but there is an even greater chance that you will lose your money.

Tip #2: Consult with a broker or financial advisor who specializes in penny stock

•just like with the stock, make sure you research that brokerage as well. Be leery of the ones who tell you that a particular stock is a sure thing.

Tip #3: Sign up for a subscription to an online service

• as an alternative to a consulting with a broker you can subscribe to an online newsletter regarding penny stocks trading.

Tip #4: Research the companies that are selling penny stocks

• this tip goes hand-in-hand with Tip #1. Look for companies with sound management and a potentially viable penny stock.

Tip #5: Remember that penny stocks not traded at stock exchanges

•they are traded as over-the-counter stocks.

On a closing note, be aware that up to 70% of the investors out there have lost money on penny stocks. Penny stocks can be very volatile. Profits should be taken while the opportunity exists. Prudent steps to minimize losses should also be taken. Penny stocks should make up no more than 10% of your portfolio.

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