Trading penny stocks is different than trading blue chip stocks. Just like with any other securities before you trade penny stocks you should learn about the risk they involve. Trading penny stocks has advantages and some disadvantages compared to blue chip stocks.
First let’s look at the disadvantages:
· Penny stocks considered riskier than stocks traded on the big exchanges. One reason is that to be listed on the Pink Sheets and the OTCBB requires less requirements. These companies are only obligated to disclose limited information. Some of these companies might be under bankruptcy.
· Penny stocks are more volatile.
· Liquidity can be a problem with penny stocks with low volume.
· You can be a victim of a pump and dump scheme if you don’t recognize it.
Penny stocks have some advantages too:
· Due to volatility penny stocks can be a lot more profitable than blue chip stocks.
· Profit is comparable with profit from trading options.
· Penny stocks don’t expire unlike options.
· Penny stocks don’t have time decay unlike options.
· Penny stocks have little correlation to the major markets.
· If you are a good stock picker you can find many good penny stocks on the Pink Sheets and OTCBB and some even on the Nasdaq and NYSE.
If you decide to trade penny stocks don’t put all your eggs in one basket. You will always have winning trades but you will have losers too. When you buy penny stocks always use limit orders and use limit orders when you sell them. This way you don’t have to sit in front of your computer while the trade is on.