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Is Penny Stock Trading Difficult?

April 25, 2012 | Comments: 0 | Views: 160

Are penny stocks hard to trade? Despite all of the problems with penny stocks and the millions of dollars of loss involved with them, there are legitimate companies whose securities trade in the pink sheets at very low prices. Struggling young companies just starting out are prime examples. Investment in such a company, held through the company's formative years, can pay off well.

Such an astute investment requires three things: the ability to choose the right company, the money to invest and hold the investment, and luck. In order to choose the right company, you must know something about the business in which the company is in competition with. You must be able to evaluate the feasibility of the company's business plan and the company's ability to compete in its chosen field of endeavor. You must be able to evaluate the ability of the company's management to run the company. Finally, you must be able to evaluate the capitalization and cash flow of the company. If you find the right company or penny stock, you must be able to hold the investment for years to allow the company to mature and for the stock to appreciate in value.

Investment in "growth" companies is a long-term investment. Furthermore, you must have sufficient capital to be able to withstand total loss of your initial investment. Investment into a new emerging company is always a high-risk investment. Finally, there is simply an element of luck in any stock investment. Yes I said luck! Luck plays an even greater role in a market in which manipulation is so prevalent. Some legitimate companies have had their stocks manipulated to such an extent that they were forced out of business. Your broker can be a tremendous help in evaluating information about an investment.

However, in the penny stock arena, there are many shady brokers whose only goal is to sell. Be sure that the advice you receive is balanced and addresses your investment needs. When in doubt, avoid a penny stock investment, especially if your broker "specializes" in penny stocks. That should be a red flag! The prospectus is the most comprehensive source information about an IPO. It sets out where your investment money will be used, describes the capitalization, history and management of the company and describes the cash flow system of the company.

If you need help interpreting the information you find in the prospectus, the Division has another pamphlet in this series entitled "How to Read a Prospectus"Trade confirmations contain a wealth of information. The confirmation will show basic information, such as number of shares, but will also indicate whether the transaction was agency or principal, was solicited or unsolicited (it will say "unsolicited" if you called your broker to place the order without your broker having tried in any way to get you to place the order) and, in the case of most pink sheet and non-NASDAQ National Market trades, provide the bid and ask at the time of execution of the transaction. Manuals such asMoody's andStandard & Poor's have current financial information about companies, and most penny stocks are listed in the manuals and are a great help to those that are just starting out. Is a great review of the penny stock trade and offers the beginner-expert find and suggest the best stock picks using the latest technology available! Expert Nathan Gold's guide and unique service can help you to literally turn.... Pennies into dollars!

Source: EzineArticles
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