Online penny stock trading is the practice of selecting less valuable shares that are publicly traded in order to fill out an investor’s portfolio. Online penny stock trading is one popular strategy for investing online, something that many individual investors might do to chase higher rewards in exchange for more risk than what is involved in owning some more established stocks. Lots of day traders and brokers are familiar with online penny stock trading and can offer professional advice about this type of equity trading.
A stock where shares sell for under five dollars is commonly identified as a "penny stock." Lots of financial professionals consider a true penny stock to be selling below one dollar per share. These stocks are generally the stocks of startup companies, or newer publicly traded stocks without a solid track record.
Penny stocks tend to be micro cap stocks, which finance professionals identify as stocks of a company with under $50 or $25 million in market capitalization. Market capitalization is the total value of all outstanding shares for a stock. Micro cap stocks are volatile and risky in many of the same ways that penny stocks typically are.
In addition to having low total value, penny stocks can also be traded “off market” in less regulated trades known as “pink sheet” trades. This also makes investing in these small stocks riskier than some other kinds of online day trading. For example, a philosophy of stock trading called “value investing” focuses on putting money into much larger, more established stocks in order to get reasonable gains over time through the organic expansion of a time-tested company or business. Investing in penny stocks doesn’t work this way; instead, investors are often hoping for a penny stock or micro cap stock to “take off” and achieve huge gains quickly, at which time the stock will often be promptly sold.
Many of those who practice online penny stock trading are looking at simple mathematics. The reality is that an investment in a penny stock, with shares under one dollar or some other minuscule amount, can only fall to a zero value, while the theoretical potential for gain is infinite. Some online traders like to acquire many different penny stocks, trusting in the law of averages to get them some big gains. Each investor or finance professional has his or her own opinion on whether this online trading strategy is likely to work. All online trading includes risk, and the investor is in the market at his or her own risk.