Penny stock trading is the buying and selling of shares of stock that are priced at under $5 US Dollars (USD) each. In many cases, penny stocks can be those of companies that are yet undiscovered by most investors, and which have the potential to rapidly increase and multiply in value. They can also do the opposite, potentially causing their owners to incur heavy losses. It is the upside potential, however, that makes penny stock trading as popular as it is, despite the volatility and danger inherent in it.
Most penny stocks are traded over the counter, meaning that they are exchanged between two investors directly, rather than through a broker. Often, penny stock trading must be done without the advantage of annual reports or other objective measures of a company's worth and performance. This can add an extra factor of risk and volatility to penny stock trading.
Not all low-priced stocks are considered to be penny stocks. For example, in a time of an economic downturn, it is not unheard-of for the stock of very large and well-known companies to trade below $5 USD per share. Penny stocks are those of very small companies, and their nature is inherently speculative.
If you are interested in getting involved in penny stock trading, it is important to realize how easy it is to lose money on this type of investment. A stock worth $0.20 USD could easily dip down to $0.10 or $0.08 USD during the course of a day, leaving you with a loss of 50% or more. The opposite can also happen with a stock that starts out at $0.08 USD, but it is hard to predict price moves, especially given the lack of available information.
The potential for large upward price moves that happen quickly is what usually draws new and inexperienced investors and traders to penny stock trading. The idea of making a lot of money with little effort can be captivating, but it rarely happens. Large gains, when they occur, are almost always balanced by large losses very soon afterward. Penny stocks are often compared, and aptly so, to lottery tickets. In other words, those who buy them are likely to lose money in the long run, all the while hoping to strike it rich.
That said, penny stocks can be very intriguing, even fascinating, especially for those who have not personally had success in the markets before. With a strictly followed program including stop losses and as much research as possible, money can be made with penny stock trading. However, it will be a wild ride, even for scrupulous and disciplined investors.