How to Invest in Penny Stocks

Penny stocks are a type of common stocks that trade for a relatively low price per share, usually less than $1, although some may trade for as much as $5.  With investing in penny stocks, the emphasis should be on identifying stocks that are projected to increase in value while carrying an acceptable degree of risk.

1. Research what types of penny stocks are available.  Stocks of this type can be found in just about every industry, making it easy to focus on investments that are connected with a business type that is currently in high demand.  Look closely at the history of the stock’s performance as well as the current financial stability of the issuing company.  Use this data to predict how that stock will perform in the future, given the most likely movement of the economy.  


2. Project the return from the penny stocks you have in mind.  While there may be signs that each of the stocks will generate some sort of return, take the time to calculate how much of a return each of the options is likely to produce.  This will help you decide which options are likely to produce the best returns while still carrying an acceptable level of risk. 


3. Find a broker.  Not all brokerage houses will deal with penny stocks, especially those that are traded over the counter, which means they are traded outside the market rather than on an exchange.  For this reason, focus attention on brokers who have proven expertise in trading penny stocks and also charge reasonable fees.  A broker who is well informed on penny stocks will have data the investor should consider before executing an order to buy or sell, making it possible to further reduce the potential for incurring losses. 


4. Execute the order.  With the penny stocks selected, the number of lots determined, and a reliable and ethical broker engaged, move forward with submitting the order for execution.  A broker can have the order completed quickly and easily, and provide confirmation that the deal is done.  


5. Monitor the movement of the purchased penny stocks.  Once the purchase is complete, follow the price movement of the purchased shares.  This will help you determine if the stock is moving in the right direction and generating returns, or if prices are falling and you are losing money.  Work with the broker to decide whether to hold, sell or buy additional shares based on what type of price movement it taking place.