Penny Stocks are also called Microcap stocks or Nano stocks. Penny Stocks are the aggregate value of the outstanding common shares of a business. This aggregate is called market capitalization rather than stock price. Brokers who trade these types of stock are available online and trade in the same manner as they trade small cap stocks real time.
Penny stocks are not traded in exchanges but over the counter. They can be purchased directly from the company through brokers. These brokers make a direct transaction between the purchaser and seller of the stocks. Brokers are not paid on a commission basis in these types of stock trading. They make money by buying and selling stock for traders when the price of the stock is advantageous. There is no fixed single price for each stock and low cap stock is sold at different prices. Traders buy stock when the price is under $5 and sell the stock quickly before a possible price downturn.
To trade low priced stocks online traders must first understand how to calculate market capitalization. Market capitalization is calculated by multiplying the stock price by the amount of outstanding stock of a company.
The trader should choose a good online small cap stock broker. For beginners a full service broker will help the trader learn the ropes of trading in penny stocks and to develop trade strategies. Though full service brokers are more expensive than discount brokers, they offer many tools to help the trader learn to trade in penny stocks. This will help the trader to do profitable stock trading in the long term. Traders should not solely depend on the opinion of the broker and should research the profitability of the stock from financial newsletters and blogs.
The benefits of online penny stock trading are that struggling companies have a larger market to sell their penny stocks. Novice stock traders can get adequate practice because penny stocks do not require a large money investment. Some returns are tax free. Struggling companies can restructure their finances by selling penny stocks through online brokers.
The disadvantage of online penny stock trading is that it is not a regulated trade. There is no large stock exchange and the large safety net offered by the exchange is not available to traders. Well known company stocks are seldom traded as small cap stock. Sometimes these types of stock are susceptible to fraud. No financial analysis or reporting is available about stocks. Struggling companies who sell penny stocks will not find a place in reputed internet financial websites that analyze stocks. Company newsletters or blogs will carry information about the stock and this information is not always authentic.
The online stock trading is a flourishing trade. The trade is advantageous to new stock traders and new upcoming companies who may find it difficult to list their stock on large exchanges. Online stocks can be purchased by small traders in every part of the world and the struggling company has a large marketplace to sell its stock.