Penny stocks are stocks that are normally traded at $5 less. Often referred to as “Pink Sheets” or “over the counter stocks”. Typically, Penny stocks are issued by small companies with a market cap smaller than stock market companies.
Pink sheets are high risk and very speculative. Although they are a great security to generate upside gains from. They are cheap to buy and promise riches, but they also have the potential for huge downsides. For traders who cannot afford to buy stocks like Amazon and Apple, penny stocks trading is another option. Despite the volatility, some Penny stocks can still generate gains.
How To Trade Penny Stocks
The first step to earning gains from penny stocks is learning to trade them..
Where To Trade Penny Stocks
To trade penny stocks you will first need a brokerage account or broker. These are the things to watch out when using a broker. Penny stock trading can be carried our via broker or brokerage platform.
Restricted Volumes – A good penny stock broker will allow trading of unlimited shares with no added fee. Some brokers will charge extra for larger orders. Some brokers even stop you from trading more than one stock a day, so you take out two orders.. costing you twice the commission.
Trading Restrictions – Some brokerage firms will only allow you to trade penny stocks via calling in, others will restrict the type of trades that you can carry out. Look for a platform that will allow you to trade penny stocks on the same platform that other stocks trade on.
Additional Charges – Some brokers will add a plus charge to stocks valued less than a set amount (e.g. $1.50). Some brokers consider a penny stock to be anything valued at $5 or less. Other brokers may set the penny stock level at $3 or less. Penny stocks typically trade in high volumes, try to avoid brokers with plus fees and look for flat commission brokers.
Penny Stock Trading
These are the do’s and don’ts of penny stock trading.
Don’t Believe The Hype – Penny stock promoters will tell the success stories without any caveats (when there are many). Try to avoid falling into traps and investing in the most hyped penny stock. Focus your efforts on penny stocks that generate a profit and have a history of earnings growth.
Sell Quickly – With penny stocks you may make huge gains in a very short period of time. If you do happen to own a stock that increases by 20% in one day, then sell quickly. Some traders will wait until their stocks increase by 1,000% before selling. This may be detrimental as you can end up losing more than you expect to.
Only Trade High Volume Penny Stocks – Try to avoid trading stocks with less than 100,000 daily trades. If you are trading in low volume stocks then it makes it harder to leave your position.
Don’t Be Sentimental – Penny stock promoters will want you to think that you are investing in a product that will change the world as you know it. If you invest in a penny stock, don’t be sentimental when its time to sell, otherwise you may miss the chance to make gains on the stock.
Research – Find someone that has investing in similar penny stocks to the ones you are researching to gain knowledge. Read reputable sources when looking at information regarding the company you are looking at investing in.
What Company To Invest In?
Most investors will gravitate towards the hottest stock at the time. The problem with investing on stocks with buzz is that that other investors have already bought in. So by the time you invest on the stock, it is already overpriced and there are not any gains to be made on it.
So, to be successful when investing in penny stocks it is important to invest early. The trick is to invest in what you know, if you are a bioengineer then you will have an advantage over other investors when looking at biotech stocks. For tech developers, you will have an advantage when investing in tech stocks. Learning how to trade penny stocks comes with experience.
When deciding wether you are going to invest or not there are some factors that need to be assessed before hand. The growth in the sector of said stock. If you are looking to invest in a defense stock for example, but the defense sector has taken a hit in the last few years, its best to avoid that company. So, try to focus on trading penny stocks with potential growth and strong profits. This is important to remember when starting penny stock trading.
Read our editor’s guide on trading options.