Understanding Common Terminology Used in Penny Stock Investing

Penny stock trading can be a complex business with its own unique language. Understanding the terminology and key phrases that traders use may help you to be a better investor. Here are some of the commonly used words and phrases you will come across in the world of penny stock trading.

Exchange-Traded Funds (ETFs)
 

Exchange-traded funds are similar to mutual funds as the stocks are bundled together and invested into multiple companies. ETF's are traded during the day where you can take advantage of moving prices and trade during that time period. ETFs are good investments for beginners.

Leverage

This is where you borrow money from your broker while not having that capital in your account hoping to pay it back when you see the return on the investment. You will need to eventually pay this money back whether you see that return or not.

Mutual Funds
 

These are investment accounts that you buy into where the holder invests your money in dozens or hundreds of various stocks that track an index. Mutual Funds are good for diversifying your portfolio.

NASDAQ Small Cap

NASDAQ is the largest American electronic exchange system worldwide. Large companies often list their stocks on NASDAQ which is regulated by the Securities Exchange Commission. NASDAQ Small Cap is a sub-section that lists companies that do not meet the necessary requirements to trade on the main NASDAQ exchange. This is where you will find most NASDAQ penny stocks.

OTC Over-the-Counter

Over-the-counter stocks are stocks that are not listed on the exchange regulated by the Securities and Exchange Commission. These stocks can be highly volatile and manipulated as they are not regulated.

Pink Sheets

These are stocks that are traded without any regulations or requirements, either because they are too small to be listed, or the company wishes to avoid filing public financial information with the Securities Exchange Commission. Due to the lack of information on stocks traded with Pink Sheets, they should be avoided.

Pump and Dump

This is when a stock is promoted or “pumped” to artificially inflate the price of the stock. A promoter will deceptively tell investors that a stock is going to rise. Once there is a large influx of investment money in the fraudulent scheme, the stocks are then “dumped” without delivering the expected increase in price. This practice is illegal and should be avoided at all costs.

Short-Selling

An investor buys shares he does not own and sells them with the commitment to buy them back in the future and return the money to the original lender. The hope of short-selling is that the price will go down in the future, the investor can then buy them back at a lower price, return the borrowed money, and keep the difference.

Stock Screening

Stock screening is a tool used by investors to search for stocks based on financial criteria. Once the criteria are met, the investor will be able to see the match for their input. This is a good way to get a short list of penny stocks that fit your needs.

The terminology of stock market trading has a learning curve to it. Hiring a professional coach or trainer may help you learn the intricacies of penny stock trading and the complex language of it.