Penny Stocks--The Secrets to Success

Information and timing are the most important things for an investor. These two aspects of investing become more important when penny stocks are concerned. Penny stocks are renowned for their “high risk, high reward,” as the adage goes, but then it takes a lot of effort on the part of the investor to know and understand which penny stocks would be worth the risk. Since a penny stock is priced very low, its standing in the market usually is not determined by market capitalization or the manner in which it is listed.

In the United States, penny stocks are traded Over the Counter (OTC) and the standard institution on security exchange, the SEC (Security Exchange Commission), issues adequate warnings about the risk involved in trading with penny stocks. Since these are small shares of small companies, their information can be very challenging to obtain and they can be easily manipulated. In the United Kingdom, penny stocks or penny shares are protected by a mandatory risk warning. In countries like India, penny stocks are known as small cap stocks and though the OTC mode of trading is not really in vogue, these stocks usually find a substantial number of investors. This is because the reward is very high. The investors who have proper knowledge and logical speculation usually ride high with such penny stocks all over the world.

With larger companies, the stakes are high and almost every investor knows something about the company’s growth and expansion plans. Curiosity fuels the quest for information. However, in the case of a penny stock, information is the major challenge for any investor. In addition, these small companies do not file reports or press releases with the standard commissions thereby making it difficult for the regulatory bodies to trace any detailed information about them. This gives way for the possibility of fraud. Given their irresistibility in terms of high-end profits, the regulatory bodies have toughened their rules and position against small companies, and they are encouraging them to file details and information. Needless to say, a vigilant regulatory system, coupled with an investor’s foresight, can yield high profits out of penny stocks.

Generally, high flying investors do not venture into the shares of small companies due to their size and lack of visibility in the share market. But if you are an investor with good contacts and a desire to cash in on any opportunity in the market, penny stocks are worth the risk and effort.

So what is the secret for success with penny stocks?
There are so many factors to consider when you start trading stocks and even many more when trading pennies.

In this article, I will describe the most important single factor that, according to many experts, that has a lot of influence on your success when trading penny stocks.  You can also learn about other factors at http://www.stocks-reporter.com .

The first and obvious step when you start trading penny stocks is to identify a few undervalued penny stocks based on their fundamentals and potential. I know that this can be a time consuming task but it is a very important one.  Next you will need to choose from your list of undervalued penny stocks one or two stocks that you would like to trade. To make that decision, you will have to check how the Momentum Indicator in those stocks is implemented.

What is the Momentum Indicator?
The Momentum Indicator is designed to track momentum (the energy, thrust, intensity) of the price of a tradable stock.  It helps to identify the relative enthusiasm of buyers and sellers involved in the price trend development.

Why is the Momentum Indicator is so vital in penny stocks?
About 95% of penny stocks are trading with very little volume or interest from investors, which makes it very hard to trade or invest in them. It’s very easy to take a position but the difficulties begin when you want to sell the stock.

With low volume trading stocks the spread between the Bid and the Ask can be very high—sometimes even more than 20%. In order to sell, you would have to “HIT” the BID price, which is much lower than the current PPS (price per share) Even if you try to sell at the BID, you may, in many cases, get a partial fill and the BID will drop even lower.
This description is highlights why it is so difficult to trade penny stocks and to make a profit.
So remember it’s not enough to find the “right” stock that you think is undervalued. You also have to know how to trade it.

Happy Trading,
Ron Kyle
Editor
http://www.Stocks-Reporter.com