How to Trade Tutorial #2 – The Ins and Outs of Penny Stocks

Penny stocks are a great opportunity for investors
and traders. But success starts with a real understanding of the fundamentals. And no
one knows penny stocks like the experts at StockBrain. Over the next several minutes,
we’ll take a deep dive into this really exciting part of the market. Penny stocks trade, of course, at a low share
price, with low market capitalization, and typically trade outside the larger exchanges
like the New York Stock Exchange. These low share prices make them really accessible to
any type of investor. Because of this low barrier of entry, you can make money with
a small investment. So let’s talk about where penny stocks actually
trade. Penny stocks typically trade over the counter or through a dealer network so trades
are dealt between individuals, instead of in a centralized exchange like the NYSE. The
notion of a dealer network is key because it presents an entirely different dynamic
than the larger exchanges. We’ll discuss this dynamic in just a second. Companies that trade over the counter, or
OTC for short, are usually smaller and can’t meet the listing requirements of the larger
exchanges. There are primarily two OTC exchanges: 1. OTC Bulletin Boards
2. Pink Sheets The OTC bulletin boards are an electronic
service offered by FINRA which has very little regulation. Companies only need to keep their
financial statements current to trade here. On the other hand, the pink sheets are a quotation
service and they don’t require that companies register with the SEC or even remain current
in their periodic filings. Small companies are drawn to the OTC markets
for two primary reason: 1. To broadly engage investors
2. To raise capital that allows the business to grow and operate OTC listed companies also experience less
scrutiny, which makes it all the more important for investors to stay informed with a comprehensive
tool like StockBrain’s dashboard that gives instant analysis. Like I mentioned earlier, stocks listed on
the OTC markets have a different dynamic. The dynamic revolves around the stocks’
lack of liquidity. Liquidity, often detected through volume, really matters when choosing
a penny stock. So let’s elaborate on the correlation between volume and liquidity. Penny stocks often trade at lower volumes,
which, in the end means less liquidity. Remember, the definition of liquidity is the degree
to which a stock, in our case, can be bought or sold in the market without effecting the
stock’s price. You can tell a stock’s liquidity by how much it is traded. Stocks
that can be easily bought or sold are considered liquid. So common sense tells you that liquid
assets are less risky than illiquid assets because it’s easier to get your money out.
Bottom line: liquid stocks are easy to buy and sell, and illiquid stocks, while easy
to buy, are often hard to sell. So let’s take a look at three penny stocks
with differing volumes and see why expert analysis in this area matters. 1. Take Fannie Mae, for example, ticker – FNMA.
Fannie Mae experiences a high degree of volume and is a highly liquid stock on a daily basis.
As you can see here, no less than 40 million shares exchanged hands in a three month period.
This means that you could more than likely buy and sell at any point. 2. Next, let’s look at Nuvilex, ticker – NVLX.
Nuvilex experiences a moderate amount of volume and is a moderately liquid stock. So with
Nuvilex, there may be times you may not be able to sell your shares at the price you
hoped. 3. Lastly, let’s look at Real Brands, ticker
– RLBD. RLBD has very low volume and very little liquidity. At times, RLBD goes days
without any trades, meaning there are no buyers or sellers and it may be very difficult to
get rid of your shares. I hope you’ve learned some of the key characteristics
of penny stocks and whether penny stocks are an investment you’d like to pursue.

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