What exactly is a penny stock?
|Holy crap. You can buy so much stock!|
Stocks, including penny stocks, are traded over exchanges. You've probably heard of some of the major ones such as the NASDAQ. Each exchange has its own requirements that a company must meet for their stock to be traded on that exchange. Since exchanges like the NASDAQ have more strict regulations concerning what companies must disclose and report to investors and the SEC, you won't see many penny stocks trading there. Instead, most penny stocks appear on the Over-The-Counter (OTC) markets.
Characteristically, penny stocks are more illiquid than other stocks. Liquidity, in this case, refers to the stocks volume, which is just another way of saying how many of that stocks shares were traded. A stock with high volume is basically just trading a lot. In order to be liquid though, that volume must be consistent throughout the trading day. Liquidity is important because it determines how easily you can buy and sell that stock.
|Never trade a stock with a chart like this|
|A trend can be more easily seen here|
Beyond just looking at a chart, you can use the more quantitative analysis of a stock's dollar volume. Dollar volume shows the relationship between volume and stock price, which provides a more accurate picture of how liquid a stock is. For instance, a stock that trades 20 million shares in a single day might seem like a high volume stock with good liquidity, but if that stock is only valued at $0.0001 a share, it only traded $2000 dollars worth of stock which is pretty much nothing. Dollar volume is usually shown when looking at stock quotes but you can give yourself a rough idea of it by simply multiplying the days total volume by the stocks current stock price (although it would be more accurate to use the stocks average price for that day). A stock that trades a few hundred thousand dollars a day or more is generally going to be liquid enough to consider trading.
Which stocks do I buy?