Penny stock investing can be both a treacherous and rewarding profession. Investors can attain huge gains quickly, but they can also lose all that profit in the blink of an eye. Some who trade in the otcbb market make a living with this "wild west" style of trading. Others will lose their trading capital as they make poor choices on stocks.
When investing in the penny stock market, you're buying low priced shares of a company hoping to make
a big splash in the corporate world. Often these companies have a product or idea that makes sense and investors can easily see why the future of this company looks bright. In the stock market, it's not all about products and dreams though. When buying penny stocks you need to look at the future outlook of the company from a business perspective.
If you buy penny stocks with weak structure this could mean the loss of your whole investment. There are many ways to check the structure of a company in the penny stock market but with these smaller companies there are often hidden issues that are not highlighted in the latest press releases. The first thing to look for when investing in penny stocks is the share structure of the company. You will also want to look at the balance sheet of the company as well as the history of the companies SEC filings. If the company is a pink sheet stock, then you will have no filings and the process becomes even more difficult.
Share structure is a main issue when penny stock investing. If the stock is at a price you like and you notice that the float (how many shares are currently being traded in the market) is low this is a great sign. You are not finished yet though. You must look at the authorized shares (how many shares the company can add to the float without filing) if the authorized shares are much larger than the float then the company can add more shares to the market. This becomes a supply and demand problem. With more supply the price drops. Sometimes the price will drop dramatically.
When trading these otcbb stocks, you must understand that the company needs to survive. They will dump the shares into the market to create capital. When the price becomes to low and the authorized shares are at the point where they are running out, the company can reverse split. Then you will lose many of your shares and the process begins again. If you buy penny stocks, you also want to ensure the company does not have a history of this behavior.