So you have heard of the massive profits possible in trading penny stocks and you want a piece of the action? Lets get up to speed then. A penny stock is a share of the common stock of a company that trades for a price of less than and is traded over-the-counter (OTC).
In simpler words these companies aren't listed on major exchanges such as NYSE, Nasdaq, Toronto Stock Exchange etc.
So where do you buy them? If you are a U.S. investor, you can three options - (1) buy Canadian company listed in pink sheets, (2) open an account with a Canadian broker or (3) open an account with a US broker that has access to Canadian securities. These options boil do whether you use a broker or do it yourself.
In the case of option (1), Pink sheets LLC publishes daily a listing of companies that are available through them. If you are going this route, you are better off doing as much research and talking to as many people as you can because this is an unregulated secondary market i.e. this doesn't have any rules imposed by the SEC. In the case of the other two options, the companies are usually listed on the TSX Venture Exchange till they meet the requirements for listing of the TSX (Toronto Stock Exchange). Also, the broker through which you buy penny stocks might be able to provide additional research services but due diligence is still necessary. In case of options (1) and (3) you avoid the cost of currency exchange while buying and selling.
Two other concerns that investors should be aware of - liquidity and difficulty of trading. Liquidity, as you might already know, means that we are able to buy and sell a stock in a relatively short timeframe. The good news is that most of the stocks traded on Pink Sheets are traded every day.
This is definitely a place where a broker's advice would be beneficial. Do remember that a brokers usually get paid depending on the number of trades that take place. Sometimes brokers engage in the unethical practice of churning i.e. recommending trades simply to make a greater commission rather than helping you profit. Not all brokers indulge in such practices. There are plenty of good ones who have yours or the clients best interests at heart. Take your time. They can be an invaluable source of advice in the investing world. As far a difficulty of trading goes, what you as an investor should bear in mind is that as long as you place limit orders, know your market and are aware of trends, you are in good shape.