Trading penny stocks on the OTCBB (Over the Counter Bulletin Board) or Pink Sheet stock exchanges involves high risk. Penny stocks, with the promise of exorbitant gains, have attracted numerous people to invest in them. Most of the time, the investor’s optimistic speculations have ended up becoming unfortunate losses.
Unfortunate as it seems, these failures have happened more often than it should because of the economical share prices of penny stocks. The low price aspect is the main factor that heavily persuades people who cannot afford to invest in the big markets (NASDAQ or New York Stock Exchange) to begin trading penny stocks.
Penny stock trading is very risky, but this does not mean failure is imminent. If an investor who is unfamiliar with these stocks spends time researching and learning how micro cap securities do business, it is highly possible that profit would be attainable. A good first step would be to implement and test a trading system specifically designed for trading stocks. Once an adequate amount of experience in the system has been achieved, making a list of potential securities would be the next step.
Constructing a list of stocks that have a high probability to increase in share price can be a difficult task primarily because companies trading on the Pink Sheets exchange are not transparent, therefore making it hard for investors to scrutinize financial statements and other features of the company. On the other hand, the OTCBB exchange requires companies to file quarterly SEC financial reports which allows for more transparency.
This basically makes OTCBB stocks less speculative than Pink Sheet Stocks. Given the apparent pros and cons, it would be very practical to focus more on OTCBB securities rather than pink sheet stocks until an absolute understanding of penny stocks is achieved.
It is advisable to initially differentiate between varying sectors within the market itself and decide which sectors may be favorable when constructing a penny stocks list. Once sectors that are favorable have been verified, the next step would be to begin screening prospective stocks to include in the list.
Usually, traders and investors break these down into two different groups, one group being fundamental and the other being technical. Fundamental traders depend on the financial aspects of the company that are the amount of debt, profit and loss statements, various ratios, and finally the company bottom line.
Technical traders, on the other hand, rely exclusively on charts, oscillators, trading patterns and various indicators in deciding which stocks to trade. These two factions have their own distinctive differences. Rarely will you encounter a combination of both groups trading the larger exchanges using both patterns in their method of analysis.
However, it is advisable to utilize both fundamental and technical methods when creating a list of penny stocks. Fundamentally, getting hold of as much information as possible about the company can provide the trader an idea of the financial state of the company, as a result allowing them to decide if they may be able to apply their business plan.
Studying chart patterns, support and resistance levels, as well as other indicators can be helpful to the trader in determining the technical character of a stock. All in all, it can be said that application of the two methodologies will eventually lead to a meticulous penny stocks list that would be very useful in actual trading.
As time goes by, with the use of a credible stocks list, the trader will be able to discover which stocks have great potential and which stocks to avoid. With a list of penny stocks that have the best possibility of gaining profit, a selection of stocks that can be bought and sold repeatedly would be determined.