Investing in the stock market is risky everyone knows that. But the stock market is really bigger than the average person realizes. There are more investment options available than just stocks. There are bonds, commodities, options and a little known one to the public, there are penny stocks. Also known as OTC penny stocks or pink sheets. Investing in penny stocks has its pros and cons. One of its major benefits is obvious, growing an amazing profit over a minimum time period. The disadvantage is massive loss due to untimely and unexpected fluctuations in the market. Therefore, prior to investing in penny stocks there are a number of things that an inexperienced trader should keep in mind.
You must do as much research as possible before you ever put money into an investment. With penny stocks you should find out what the share structure and distribution of shares are. If you one person or entity owns a majority of shares and its in unusual account, stay away. Everything should be out in the open and available to the public if it is a legitimate stock. You need to be wary of putting your money into a stock that is primarily owned by just a few investors. If you invest in something like that you can bet that as soon as the stock goes up they will sell and you will lose all of your money. It is preferred that you pick a stock with a large number of investors.
It is extremely important that you do your background research on penny stocks. You should contact the company either through email or the best way is to actually phone them. Do not hesitate about calling a company to find out about its financials. Big time brokers do this everyday on Wall street with major corporations. You are on the look out for fraudulent companies, so even if someone answers the phone it does not mean that you are in the clear. Double check the number to see who the phone company says leases it. Try to find business listings for the officers of the company. Contact them if a number is given. If you can not find any of this information DO NOT INVEST in it. It is a scam.
When you finally find a stock that you think has potential, double check everything again. Look at the current history of the company and find out what its long term history is also. See if it has a promising new product or service coming out that will substantially make the company worth more. Look for press releases or company news items. Check the company's history for reverse splits or reverse mergers, these usually point to a bad financial decision by the board of directors. Try to find a company that has a long and successful history. By long since this is a penny stock it will not be decades, it will be a few years. If a company is decades old and still a penny stock, it is a loser.
As in all investments you must realize that you could lose. All investment vehicles have risk. Penny stocks risk are greater because there are so few shares and fewer investors. Your personality and the amount of money you are willing to invest and lose are part of who you are. Pick an amount that you can afford to lose, never bet the farm on investing.
Since most penny stocks are new ventures they do not usually have a definitive revenue stream. They are starting something new and are developing their revenue streams. Finding out the current revenue streams and reliable financials are the challenge that you will face but you must put in your time before a single dollar is invested. Most penny stocks prices move on speculation. To be able to determine which penny stock is going to prosper you might want to use alternative research strategies.
The best alternative research strategy is a newsletter. Pick one with a winning, documented record. There are several out there that specialize only in penny stocks. That is the best option until you develop the knowledge yourself to be able to determine all of these specialized skills.