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Trading penny stocks may seem like a great way to generate some quick income to the novice investor. Unfortunately, there are many downsides to investing in these types of securities that most new investors don’t consider. Many inexperienced investors simply look at the share price as the only criterion when trading penny stocks.

Evaluating a stock solely on it’s share price can lead to a quick loss on your investment, not to mention a hit to your confidence as a trader. Trading penny stocks is typically one of the most riskiest stock market trades around. Based on thin trading volume and high volatility, buying penny stocks is not for the novice investor. Remember that there will always be a more experienced investor on the other side of a trade waiting to take your money!

While there are plenty of good reasons to stay clear of trading penny stocks, there are also several reasons to like them. So how is an investor to know the basics of trading penny stocks with little prior knowledge? Below is a list of characteristics of penny stocks that you can use to get started.

Characteristics of Trading Penny Stocks

Here are a few characteristics that can help you identify a few of the characteristics involved in trading penny stocks.

• Share Price – Some institutions classify a penny stock as any security that trades under $5 per share. Others may define a penny stock as a security that trades under $1 per share. Regardless the classification you want to use, penny stocks in general have a low share price that consistently trades below $5 per share for many months. If you plan to start trading penny stocks, this is your first place to look to identify them.
• Lack of Information – Another characteristic to look for when trading penny stocks is the amount of public information that is available. Most of these companies have very little information that is readily available to the public. This fact alone makes it virtually impossible to complete any valid fundamental analysis on the stock.
• Low Volume – Almost every penny stock that is traded is done with little volume. This is significant as low volume can be a way for others to easily manipulate the share price. Pay very close attention to the the average volume of a stock before making a trade. If you are going to start trading penny stocks, you need to be ready for low volume.

Trading Penny Stocks Recap

There is money to be made from trading penny stocks if you can educate yourself properly. Simply buying up stocks that have a low share price is a recipe for failure. Instead, use some of the characteristics identified above to help guide you to an educated decision.

Trading penny stocks is not recommended for novice investors. If you are still interested in placing these types of stock market trades, then educate yourself before putting your hard earned money on the line. The more you can learn about trading penny stocks before you start, the better you will be when you are ready to place your first buy order!

Tags: Penny Stocks