Penny stock trading is the trading of small value stocks, also known as microcap stocks. The term penny stocks was founded many years ago as it used to be defined as all stocks that were traded below the price of $1 but now includes all stocks that trade under $5. Along with these stocks being low in price, the volume that are traded is also quite often low as a lot less number of shares are released. Quite a lot of companies that have these low priced shares have just been floated and are fairy young in terms of the stocks age.
Trading penny stocks can be very lucrative which makes it very appealing to those who either like a bit of risk of really know what they are doing. If you know what you are doing you can stand to make very substantial gains in a very short amount of time because of low price you pay per share and the volatility of the market. You can sometimes make gains in the area of 500% or more easily when you think about it, say you buy a share for 5 c and then it is all of a sudden at 50c then you have made a 500% profit. Although you can make massive gains you also have to realize that it works both ways meaning that you can make big losses just as quick for this same reason.
Many new comers to the stock market start trading small cap stocks because of the low startup capital needed. You can start trading these small cap stocks with just a few hundred dollars whereas you would need at least a couple of thousand to get started trading blue chip stocks. For example, to buy just one share in apple at the moment would cost you around $483 (as of 7th October 2013).
Trading penny stocks has gained a reputation in some circles as being rigged in a way because of so called pump and dump tactics. A pump and dump tactic is like this, someone says to people that they know a lot about trading small cap stocks and they give you penny stock tips. They give a lot of people the same tip and because of the low volume of stocks traded the stock price rises artificially because there are a lot of people buying it at once, this is the pump. Then when the stock tip goes out to the investors a large volume of shares are sold off, the dump, and then the people that sell off while the price is still high make a handsome profit while those that don’t sell off in time end up making losses. This method only works if you are on the receiving end of the information and buy early and sell as soon as the tip comes to sell. If you are on holidays or unreachable and miss the stock tip to sell then you could lose everything. You can also end up making very big returns quite often if you receive good information.
Now that you know the basics behind penny stock trading you will be able to better understand what is going on and make a better informed decision if you wish to start your journey in the lucrative area of penny stock trading.