Let me start of by saying penny stocks are a bit more complicated than securities on major exchanges as they require knowledge of the way the penny stock market works. Penny stocks require
· A funded brokerage account
· An above average risk appetite
· An understanding of the way the market works
it is important that you have a brokerage account such as ETrade ( which has its own clearing house), so that you do not encounter restrictions from the likes of Scottrade who by the way utilize Penson. Penson is a clearing house that recently got greedy and has been trying to rip traders and investors off with high commissions under the auspices that stocks are DTC ineligible.
It is always better to know how much you are going to pay to buy a security, and also be aware of how much it will cost to sell your position in that given security. The cost to sell the security should not exceed the amount that it cost you to buy the security.
Like i mentioned above, It is also important that one knows that penny stocks are extremely volatile and therefore could swing wildly. Penny stocks are usually not as liquid as large caps stocks. Therefore, when they get coverage not limited to news, they get very volatile and could run as high as 100% or more in one day. It is important to understand that it takes one with a huge appetite for risk to trade penny stocks. Mainly because the same way the stock rises, so can it fall.
This crash course was written under the assumption that you understand that penny stocks are stocks that are trading under $5, and are not quite as liquid as medium to large cap stocks.
Note that penny stocks can lose value very fast on negative news. Read our disclaimer for more information.