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A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets.

The term itself is a misnomer because there is no generally accepted definition of a penny stock. Some consider it to be any stock that trades for pennies or those that trade for under $5, while others consider any stock trading off of the major market exchanges as a penny stock. However, confusion can occur as there are some very large companies, based on market capitalization, that trade below $5 per share, while there are many very small companies that trade for $5 or more. The typical penny stock is a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards. Once you've had a big success with a penny stock, you may want think logically about cashing out so that you maximize your advantages and benefits. For example, taking all the money off of the table and buying a house or a boat or getting some dental work done may not always be the best idea, but that's what you're doing it all for anyways, isn't it. On the other hand if you let the money ride in the stock, expecting even further gains, the stock could come crashing down and wipe out all your profits.

A solid strategy that more experienced investors often use is selling a fraction of their holdings. This is a good approach if you are uncertain that the stock will go higher or not. For example, you could sell 1/2 of your holdings and let the other half ride. These proportions are popular once a stock has increased 100%, as even a subsequent collapse of the stock in question leaves you at least at break even, but you still get to benefit from any further price appreciation. What if you have found another investment you are interested in? You could leave 1/3 of the original stock on the table, take 1/3 of the cash, and put 1/3 into the new investment. The ratios are really dependent on the situation, but the overall concept is a very good methodology, specifically geared towards investment in volatile penny stocks.

It may be a good idea to take some time off of trading before putting your gains back into the market. Understandably you may be running on adrenaline or emotion after your profits, and until you are once again emotion-free it is never a good idea to trade. Investing should be a very logical and boring business. In Vegas there is a concept called 'playing with house money.' In short, they have found that gamblers are far more likely to be risky with casino winnings than with the money they walked through the door with. While $1 = $1, a player that wins big early on in the night is likely to be frivolous with that money, and not be as upset once he or she has lost it all.

The exact same concept holds true for stock market investing. If you just made a few thousand off a stock, you are more likely to dump it into the next 'hot thing' without following the same method that helped you pick that first winning company. This problem can be easily avoided by taking a week or two before putting the capital into another investment, because by then your emotions may have subsided and your logic could have taken over again.

Cashing out after a big run-up in a stock is also a good idea if you have intentions of getting back in later. Often profit takers will push the share price back down, at which point you can sink your cash profits back into the shares at lower prices than you had just sold at. What's worse than selling too early? Right, selling too late. Don't try and pick the exact top of a stock. This can only be done by chance, and no professional trader has ever consistently come close to picking trading bottoms or tops. Instead, when you've made a good gain from your shares that you are happy with, take your profits off the table. Don't look back later and regret it if the shares go higher. As soon as you start regretting profits, you've got to reassess if you are cut out for this, the greatest game on earth.

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