By Ellen Wilson
While penny stocks make some investors uneasy, others have been able to invest a thousand dollars and turn a tidy profit.
The U.S. Securities and Exchange Commission (SEC) considers anything that trades under $5 a share a penny stock. Some stocks that trade on the major exchanges, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ), are priced under $5 but penny stocks are normally traded over the counter or through day trading, not through exchanges.
Penny stocks are low-cost stocks with relatively small market capitalization, termed “small cap” trades. Capitalization is a company’s outstanding shares multiplied by share price. The definition varies from brokerage to brokerage.
The advantage, when you invest in penny stocks, is the chance to beat larger investors to the market and gain a piece of an emerging company.
Peter Leeds wrote the book on profitable trading of penny stocks, literally. He’s the author of Invest in Penny Stocks.
According to Leeds, the key to making a profit is understanding when to buy and when to sell. But you also need to be aware of the unscrupulous practices of some of the people who push penny stocks.
A common scam is “pump and dump.” Someone who wants to take advantage of others using this scheme will promote a penny stock through direct marketing, pumping up its value, whether it’s a wise investment or not. When it reaches a price that willresult in hefty profits for the promoter, he’ll dump his shares, leaving the others he’s conned into investing – and the company – holding the bag.
This is one of the biggest reasons for the bad reputation of penny stocks. Investing in startup companies and companies trying to regain their footing comes with risk. Some of them just won’t make it.
To invest wisely, you need to find companies that have a great product and solid business fundamentals.
According to CNNMoney, some traders have been able to turn a small investment into big money.
Tim Grittani built a portfolio worth more than $1 million based on his life savings of $1,500.
He says it can be risky and not everyone is cut out for penny stock investments.
The SEC warns investors in penny stocks they should be prepared to lose their investment.
Grittani was not immune to that fate. At one point, he was $1,300 down.
He made his first successful trade watching a pump-and-dump unfold. He received an email about the stock, recognized it and invested knowing it would collapse.
He put in $3,000, watched the rise for 10 minutes, and then sold his stake. That earned him $2,000.
Like Leeds, Grittani says the key is to get in at the right time, before the majority of the crowd, and sell before it tops out.
Both say you need to understand what you’re watching and watch carefully to be successful. If you have the time to watch carefully, even a small start can earn a good return.