“Find out how an ordinary accountant quit his job after making it big with penny stocks.” “Discover how you could turn $10,000 into $100,000 with penny stocks.” “Here is how to make your first million in under a year by trading penny stocks.”
This is the kind of language that surrounds penny stock trading. It is a glamorous, fast-paced world, and many of the success stories you hear truly are jaw-dropping. A few of them are even true.
I’m going to give it to you straight. You can make a ton of money trading penny stocks, but it isn’t easy, and it isn’t for everyone. Penny stock trading is highly volatile, and as such, is more speculative than other more traditional forms of investing. That means that the stocks you invest in do have the potential to soar—but they also may crash and burn.
In this guide, I am going to teach you everything you need to know to get started with penny stock trading. Let’s start with the very basics, and talk a bit more about what penny stock are and what makes them different from other financial instruments.
The definition of a penny stock is simple:
A penny stock is any stock which is currently valued at a very low price.
Despite what the name implies, most penny stocks do not cost a penny. Sometimes you will see a penny stock defined as “any stock which is valued at less than a dollar,” but that is not really accurate. A penny stock may be $1, $2, or more. In fact, if it is valued at $5 or less, it is generally defined as a penny stock.
Penny stocks are unusual in that not all of them are traded on major exchanges like NASDAQ or NYSE. There are some cheap stocks on NASDAQ and NYSE, and these do count as penny stocks—but they are just the tip of the iceberg.
Where are the other penny stocks listed? A couple of services which are noteworthy are OTCBB, which stands for “Over-the-Counter Bulletin Board,” and Pink Sheets. Between the two, OTCBB lists the less risky stocks; Pinks Sheets on the other hand follows no strict listing requirements.
These stocks are actually quite easy to buy despite not being listed on a major exchange, because you can just use the same stockbroker you do for everything else. So whether you are buying penny stocks on NASDAQ, OTCBB or any other exchange or listing, the process is pretty much the same.
Why invest in penny stocks? He are the advantages that they offer:
One awesome thing about penny stock trading is that you probably do not need to look for a broker. If you already are a stock trader, your current broker most likely can handle the transactions for you.
That means that if you are all set up with a stockbroker, you need only start searching for penny stocks to invest in. There are a few approaches you can take here:
A lot of traders simply buy the top penny stocks they see recommended—but this is not the best way to trade. Yes, it saves time, but it will lose you money. If you want to win at this game, you need to do your homework.
How to buy penny stocks is a question some novice traders ask. The answer is simple, open a brokerage account who offers penny stocks. Penny stocks are traded on the NYSE, NASDAQ, and OTC Markets.
You’ll need identification along with confirming your income and risk tolerance before opening a brokerage account. However, the process is fairly straightforward and usually takes 24 hours or less. Take the time to demo each trading platform before selecting a broker. Once you are set up with an online brokerage you can buy penny stocks with a few clicks of the mouse.
Penny stocks are traded on the Nasdaq, New York Stock Exchange, and OTC Markets. You can buy penny stocks through a stockbroker. Opening a stock brokerage account is straightforward and can be done online. You’ll need prove your identity,as well as accurately describe your financials including income and net worth. However, the process typically takes 24 hours or less to get started.
Now, you can buy penny stocks through a number of different discount brokers. Some considerations traders have before selecting a broker include: charting features of the trading platform, ease of trading platform, commissions, minimum deposit, shares locates. Check to see if you can demo the trading platform before making a decision. On the other hand, some traders will have multiple accounts with different brokers, adding flexibility to their trading.
The best penny stock broker is one that offers a decent commission structure and trading platform. For example, the popular app, Robinhood, does not offer OTC penny stocks to its clients except on a few rare occasions. On the other hand, brokers like etrade, TD Ameritrade, and Interactive Brokers are among the most popular for trading penny stocks.
Before selecting a broker, think about the commissions, as well as the ease of use of the brokers trading platform. Does it have quality charts? Or having any other special features. These are among the questions traders ask before deciding which broker to go with.
If you are serious about winning with penny stocks, you need to investigate any company you are thinking of purchasing stock in. Here are some questions to ask yourself:
Some of the best companies in the world were once penny stocks. The reason why investing penny stocks makes sense is because of their huge upside profit potential. That said, penny stocks are not generally covered by wall street analysts.
However, that also means you’ll have to do your own due diligence. Only look to invest in penny stocks that are transparent and disclose key information about their financials and business outlook.
Need proof that penny stocks really can soar? Here are a few that have made headlines:
If you can spot opportunities like these you can make a killing.
One thing which is vital to know going into penny stock trading is that unfortunately this niche is replete with scams, particularly “pump and dump schemes.” What are pump and dump schemes? This is where shareholders in a penny stock make a concerted effort to artificially inflate the stock’s price through circulating misleading information. When the price goes up, they sell and cash out.
The sites and materials distributed by pump and dump scammers often look official and trustworthy. But if you buy into their stocks, you will end up losing a ton of money by investing in worthless stocks.
Thankfully, the trick to avoiding this is pretty simple. Just do the research I recommended earlier every time you are considering buying a penny stock.
Penny stock trading isn’t for everyone, but if you have the right personality and mindset, you could make great money in this market. Ask yourself if you have the following traits:
If that sounds like you, penny stocks could be your road to riches.
When you’re trying to figure out what penny stocks to buy today, you’ll want to develop a watch list. Generally speaking, you’ll want to buy penny stocks that have a catalyst. The reason being is that stocks that have catalysts are usually volatile.
As a trader you need volatility in order to capture short-term profits from the market. Subscribing to a service that captures news in real time can be helpful when you are looking for stocks that have catalysts. Because penny stocks are not covered by most analysts, a news story has the potential to move a penny stock and create volatility.
Creating a list of penny stocks is a savvy way to prepare yourself for whatever lies during the trading day. For example, you can create lists based on percentage movers, largest gainers/losers, 52-week highs/lows, etc. Or you can create a list based on penny stocks that have high short interest, these could be a short squeeze list.
Of course, you can also get more detailed. By listing stocks by sector. This can be useful when a certain sector, like marijuana or cryptocurrency are in the news. Having lists based on different market scenarios or sectors can help you make better and faster decisions.
Looking for penny stocks tips and tricks? Here are a few pointers to help you succeed:
Day trading penny stocks can be a very profitable venture if you are caught on the right side of the trade. Most penny stocks are low caps that are not covered by wall street analysts. That said, they tend to react more when there is a news event surrounding the stock.
Investing in a service that alerts you on breaking news might be worthwhile if you intend to day trade penny stocks. Of course, that is not the only thing that matters. In fact, you can even use alerts created from your trading platform that point out large daily moves.
There is one certainty with penny stock investing, and that is that you will never be bored. In fact, most of the time you will probably feel like you are on a rollercoaster of volatility. Most penny stocks are worthless, and most penny stock traders will lose. But if you can spot the diamonds gleaming from amid the coal, you could find yourself making money hand over fist.
Looking for news, education, and tips on hot penny stocks? Sign up for our free alert service at The Stock Dork and get NASDAQ and NYSE stock alerts delivered right to your inbox.