Penny Stocks 101

Getting started with penny stocks is simple, and can be fun and profitable

Man Teaching Stock Market Investing
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Getting started with penny stocks, sidestepping the common pitfalls, and finding the best investments, are all much easier than most people realize. In fact, if you can open an online bank account, you can just as easily be up and running trading low-priced shares.

Before You Begin

Most investors are anxious to get their money into the markets. They want a few hundred dollars to start changing their life. With that attitude (which is exactly what mine was like when I got started, which resulted in losing 100% within two weeks), you might be heading towards failure.

You should always start with no money and zero risk. Paper Trading is a wonderful method to see how much you would have made (or lost). There isn't any rush to skip this step, because the penny stock market will always be there waiting for you.

You do not need fancy software, the best broker tools, or the latest apps. You need a pencil and a piece of paper. Paper Trading, instead of jumping in before you can demonstrate (theoretical) profits, is and will be the single best decision you will ever make in penny stocks.

Avoid Common Risks

Sidestepping the most common penny stock risks is very simple. So simple in fact, that having made a few of them, the 14-year-old version of me feels pretty stupid.

Risk Money Grows Fastest

You have probably heard about using "risk money" with speculative investments. Beyond the obvious reasons to keep your rent check and grocery money out of the latest 5 cent penny stock, there is an abstract, albeit widely unknown, benefit.

Investors who feel stress, frustration, impatience and obsession with their investments tend to act emotionally, rather than meticulously. Trading decisions are typically made for the wrong reasons and derive the wrong results.

Risk money, on the other hand, results in looser, more patient, and wiser behavior. With this attitude, better decisions are made. This is both a theoretical truth and an observed fact we've encountered over the course of many decades and 40,000 subscribers.

Discount Stock Broker

All you need to trade shares of any kind is an (online discount) stockbroker. Opening an account typically involves filling out a few forms, and most people are up and running within days. Depending on the policies of the broker you choose, there is a required minimum amount of cash which needs to be deposited. This ranges from zero to tens of thousands of dollars.

Many brokerage firms will require you to sign a penny stock risk disclosure form before you can trade them.

Once the money is deposited, and your account is set up, you will be able to use those funds to buy and sell stock...which leads us to the most important part of Penny Stocks 101.

Risks of Penny Stocks

Penny stocks can be very risky. These are low-priced shares of small companies not traded on an exchange or quoted on the Nasdaq. Pricing can be unavailable and there is a risk you cannot sell your shares once they're acquired. These securities can also be susceptible to pump and dump schemes, unusual auditing issues, SEC trading suspensions, and situations in which assets are large but revenues are small.

For more information, please review the risks with your financial advisor or visit the FINRA website.

Start Smart

Start smart, use only risk money, and learn how to find the best stocks before you begin. Trading is simple, and even better, it is fun. When you turn a few dollars into something more substantial, you will be absolutely hooked!

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.