You have probably heard of penny stocks and wondered what they are and how they work. Many people in Canada confuse penny stocks with small-cap stocks but they are different in many ways.
This article will introduce you to penny stocks in Canada and answer as many questions that you may have about penny stocks. This article will help you to get started with trading penny stocks in Canada. We have suggested platforms where you can start trading penny stocks.
What are penny stocks?
Penny stocks are shares issued by small companies that trade below $5.00. They are traded over-the-counter meaning stocks are traded between two parties without the supervision of the exchange. Penny stocks in Canada can include stocks of companies with no active market. Not all penny stocks are traded over-the-counter some are traded in the securities exchange.
Since they are sold by smaller companies they are very liquid in nature. They tend to be volatile because of the small number of shares sold in a day. Small companies can sell as many as 50 000 shares in a trading day while big companies in the securities exchange sell millions of shares.
The volatility of the shares can be caused by 1 or 2 shareholders liquidating their shares at a go. If you are to invest in penny stocks you will always need to keep your eyes on the share price. With the reason given you can conclude that penny stocks tend to be speculative.
Why do companies sell penny stocks?
Companies in Canada sell penny stocks for different reasons. Since the companies are too small and don’t have enough capital to list of the securities exchange selling penny stocks seem to be a better option. Below is a list of reasons why companies sell penny stocks.
- The company won’t be having sufficient resources to list
- The company will still be at an idea phase
- Need for liquidity
Is there fraud in the penny stocks exchange?
The company was called aerotime international which supposedly was awaiting patent approval. These tactics are very common and used. Those who don’t do their research tend to burn their dollars. Pump and dump schemes are inevitable in penny stocks and this is a fraud. This is where a broker will buy a stock at a low price and lure inexperienced investors to buy stocks so that the price can increase. When the stock price is up they then sell some or all of their penny stocks at a profit. The inexperienced investor will then lose their money since the share price will decrease after the broker liquidates their shares.
Here is a list of scams that you need to be aware of before you start your journey :
- Guru scams- these are done through adverts showing how an expert became rich buying certain penny stock
- Offshore rackets—this is where an inexperienced investor is sold inflated offshore company shares in Canada.
- Reverse merger deceptions- this is where a company merges itself with a public company so that the company stocks can be publicly traded without a hassle.
- Mining scams – this is whereby a company claims to have found a mine so as to increase the price of the
Stock as there will be potential earnings from the mine.
Why are penny stocks risky?
- Lack of public information: Over-the-counter companies are not required to file with the securities and exchange commission like other companies traded on the securities exchange. This makes it difficult for the public to know and understand the company. The results of the company tend to be not so easily accessible.
- Lack of history: Penny stocks in Canada have a poor track record. Finding financial and other historical company information tends to be hard.
- Low liquidity: It is hard to sell penny stocks as it takes time to find a willing buyer. This leads to price manipulation and a threat of getting scammed.
- No minimum standards: Companies just start trading penny stocks and there are no standards in how to start selling. Unlike the securities exchange, the penny stocks market is not regulated.
Why trade penny stocks?
Since penny stocks are much volatile and bear more risks than popular stocks you may need to be more careful. There is money to be made trading penny stocks but you need to be able to know what to do. Maybe the first question that you need to ask yourself before starting is, how much money am I willing to lose? If you know the answer to this then you can get started. Penny stocks in Canada are speculative and are not for long term trading. Keep in mind that you limit your investment to a certain threshold.
Remember that penny stocks in Canada are stocks under $5.00 so your investment needs to make sense. You need to do your homework to become successful trading penny stocks. Don’t just invest because you think the stock is going to go up, do your research and understand the company. Know the directors of the company including management. Know the company strategy and how it is going to be implemented. You can make an informed decision from this otherwise don’t even buy a stock if you are just told it will perform better.
Platforms you can use to trade Penny Stocks in Canada
Here are the top 5 online trading platforms you can utilize:
Penny stocks can be a good investment but can be a distraction if you don’t know what you are doing. You must avoid noise from the outside when investing in Canada penny stocks. Start with research before investing your dollars. There are myths that you will be getting more for your money since you will be buying stocks at less than $1.00. But that is not the case, considering the risk attached to the investment. Do your calculations thoroughly and you will be good to go.