Penny stocks are stocks that cost less than $5 a share. These stocks are not only cheap, they are full of opportunity… if they go up. However, you can make money either way with penny stocks.
Just like regular stocks, you can trade penny stocks in a margin account. The concept is more basic than people think. If you think a stock’s price will increase based on research, you would buy a call or sell a put. If you think the stocks price will drop, you would sell a call or buy a put. Depending on which way you think the market will swing is how you bid. Options are usually left open for a few months. At any time during this time an option could be exercised. With penny stocks, you pay a lot less making option trading less risky. However, option trading is always risky and should only be used by those who have financial trading experience or are working with a financial adviser specializing in options.
When you buy and sell penny stocks, you spend a fraction of what you would buying a stock that is established. These stocks tend to be used by investors for more short term gains, but there are many companies that have started out trading as penny stocks that have had major booms. Your best bet is to do a lot of research, not just on the alpha and beta of the stock, but on what the company produces, previous sales, etc. Real word data versus straight projections are the basis of all good research of a company’s strength.
Like any stock, you can buy and sell penny stocks within your IRA or Roth IRA as much as you want with no tax consequences. This makes penny stocks even more attractive in these vehicles because you can have all of the gains and keep every dime. You can keep investing in penny stocks with the extra cash you are making, or you can put it into a money market account within your IRA and distribute it to your mutual funds within your IRA. The possibilities are endless. Of course there is the chance that you are going to lose. The good thing is that you don’t have to spend a lot, to make a lot.
It should be understood that buying penny stocks may be riskier than buying stocks traded on the NYSE. The regulations are not as stringent, and company info may be hard to find. Beware of company reports that seem too good to be true. They probably are. There are many penny stock rating companies out there. The best one that I have found is the Penny Sleuths. The advice and companies they recommend are usually on the cusp of breaking through into large markets.
Consult with your financial adviser about penny stocks to see if it is something that will fit into your portfolio.