Low value stocks are typically any stock trading for less than $5 per share. Also called “penny stocks” because they often trade for just a few pennies a share, they are growing in popularity with investors looking to play the stock market without investing large sums in stock.

Low value stocks are not traded on the major stock exchanges, like the New York Stock Exchange or NASDAQ. Instead, they are traded on the over-the-counter (OTC) market, which has less stringent requirements than the major exchanges. Investors who trade in low value stocks tend to be stock day traders, who purchase and then sell low value stocks over the course of a single day hoping to capitalize on price swings. Low value stocks are purchased through accounts established with a brokerage firm.

Types of Low Value Stock

There are several kinds of low value stocks that investors can purchase.

  • New or small companies may offer low value stocks to quickly raise capital.
  • Occasionally, older companies that have been listed on other markets for years but have fallen out of favor may sell shares on the OTC market.
  • The best-case scenario for investors looking to make a substantial profit is low value stocks sold by companies that are in the process of reorganization and turn around after years of disappointing investors.

Many investors wrongly assume that just because a stock has a low price, it means that it is worthless. That’s not necessarily true, and many a bad investment has been made in a stock only because it carried a high price. It can actually be more rewarding to find a stock that is undervalued and offered by a well-known company that has a good track record of delivering high value for a low investment.

Developing a Low Value Stock Strategy

If you are interested in trading in low value stocks, start by opening an account with a brokerage firm that trades in that type of stock. It might take a little work to find a reputable one.  The ideal firm should have:

  • Low transaction fees because you’re not buying these stocks to build a portfolio, but instead to buy low and sell high, often in the same day.
  • Interactive stock screens that allow you to follow the action and quickly move to liquidate your stocks.
  • Profit and loss tracking that can be used when it comes time to file taxes based on your activity.
  • Trading tutorials that can guide you through the intricacies of trading in low value stocks.

There are some basic tips you can apply to develop a trading strategy:

  • Learn how to analyze stock using price charts in order to understand the movement of low value stocks.
  • Follow the news in stock periodicals and websites where information about a stock you’re interested in can be found. A good source is OTCmarkets.com, which posts quarterly and annual reports from companies that trade on the OTC market.
  • Learn to recognize signs of things like “pump and dump,” which involves the hyping of a stock days before the large-scale selling starts. Once interest has been peaked, the stock is sold at inflated prices.
  • Watch for sudden increases in the number of authorized shares and shares outstanding. If they rise, the share price will go down.
  • Don’t listen to the experts unless you’ve seen a pattern of success, and don’t pay for their advice. If they were making money trading, chances are they wouldn’t be hawking their advice.
  • Keep a level head. Panic never served an investor well.
  • Learn to let go. Holding a stock that has already shown upward movement because you think it can do better could result in a loss of profits gained. Perhaps set a percentage of increase that is your standard sell point and stick to it.

Remember, you’re looking for low value stocks. A good rule of thumb is to buy a stock when it’s selling in the single digits, and hope that you’ve put in the time and research to get it before it reaches double digits.

There’s always a risk, however. Be prepared for the lows as well as the highs. The ability to remain and take the good with the bad is probably the best practice when it comes to trading in low value stocks.

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