Helpful Tips For Penny Stock Investors

If you are interested in trading penny stocks, here are some helpful tips. It starts with the basics and ends with some more advanced aspects.

Penny Stock Tip #1: Be Cautious of the Penny Stock Market

Investors can find penny stocks in several different types of exchanges, with some coming with more risk than the other. Considering that penny stocks are defined by the SEC as shares which trade for less than $5, investors can find numerous penny stocks on the major exchanges such as the NYSE or NASDAQ.

Below the major exchanges is the Bulletin Board (OTC-BB). It is owned by the NASDAQ and is where one would find “higher quality” penny stocks. The reason being is that the exchange has listing fees, standards and reporting requirements. Lastly, there are the Pink Sheets, OTCQX, OTCQB. This is where one should show more caution. The fees, reporting requirements, and operating standards are far less strict than that of other exchanges.

Penny Stock Tip #2: Avoiding Penny Stock Scams

Being that penny stocks are thinly traded and lightly followed, combined with their low share prices they may become the perfect target for scams.  It is not uncommon for someone to purchase a large amount of a near-bankrupt, somewhat lifeless stock then try to manipulate the share price higher using lies or exaggerations.  Then as the share price increases, they sell their shares which then can result in the stock collapsing.

Penny Stock Tip #3: How To Trade Penny Stocks

Learn technical analysis.  There are several simple tools that can be used to improve your trading, for example Relative Strength Index (RSI) or the MACD, short for moving average convergence/divergence.  There are several technical analysis options to discover and use, if any at all, to see which works best for your trading style.

Beware of confirmation bias. This is something that affects nearly everyone, and nearly every newbie investor. Seeing what you want can possibly cost you your entire portfolio.

Something To Keep In Mind

Consider using limit orders, rather than market orders, when trading penny stocks. The reason for this is your purchase or sell of shares in a penny stock can result in the price changing due to your trade, a buy may cause the shares to temporarily and artificially increase before dropping back down after you’ve been filled.

Consider using stop loss orders. A stop loss will sell your shares if the price falls to a certain point, which in turn can limit your downside.  By committing to a certain price point for a stop loss early on you will minimizes losses.