definition of a penny stock

Learning how to buy penny stocks for the first time can be stressful. This guide will aim to help traders learn about penny stocks and how to start trading them. Before we dig in deeper, let’s start with the very basic definition of a penny stock

definition of a penny stock

According to the Securities and Exchange Commission, the definition of a penny stock is a stock that trades below $5. These equities are typically traded over the counter however there are penny stocks that trade on major exchanges as well. They usually are lower liquidity stocks so they can be incredibly volatile. With that comes a higher risk factor.

Some brokers do not allow investors to buy penny stocks at all. In fact, some of the most popular stock brokers restrict access to OTC stocks in particular. But this doesn’t mean you can’t buy penny stocks at all. It means that you need to do some research before picking the best broker to use.

Penny Stocks Are Not For Everyone

Penny stocks are extremely cheap which makes them very easy to purchase. You can make a small, initial investment and turn in to a pile of money. The flip side is that penny stocks can take away large amounts of money as well. Like many things with high potential rewards, the risk is very high.

In fact, the risk is so high that most people will probably lose their money. The sad truth is that because these stocks are so cheap and can increase rapidly, new traders will think of a list of penny stocks like lottery tickets. Don’t do that! If you’re serious about making money with penny stocks or any stock for that matter, you must treat it like what it is: an investment.

How to Trade Penny Stocks

Many also fail because they don’t know which penny stocks to buy. Purchasing defunct penny stocks, for example almost always make people lose their money. These are things like low priced penny stocks to watch that trade below $0.05 or even below $0.01.

Many of these companies have non-existent businesses and are essentially, “ghost ships” or shell companies. It’s vital to research any penny stock that interests you so that you can properly assess the risks. Those trading penny stocks may want to focus on ones listed on larger exchanges like the NASDAQ. The main reason is that these larger exchanges usually offer more liquid penny stocks compared to Over The Counter.

Penny Stocks In Proportion To Your Portfolio

A huge step when deciding to buy penny stocks is assessing your personal risk tolerance. After doing so, determine how much money you would be willing to use for penny stocks. This “risk money” is anything you can afford to lose from trading penny stocks. Some people set this at 10% or less of their overall portfolio but the choice is truly up to you to make.

Gain Experience From Other Penny Stock Traders

A good way to expose yourself to penny stocks is by finding professionals who have been trading for a while. A lot of them have social media where they talk about some of their trades and mistakes they have made. This can be some of the most valuable information because you learn hard lessons without losing your own money.

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Be wary of some traders who appear to be “successful.” This includes people who try to promise you unrealistic returns or guaranteed profits. Ideally, you want to find professionals who have a strong track record of teaching other investors and not pumping stocks. If you’re new to penny stocks then you also need to understand that some people will try to manipulate the markets in some of these companies.

They’ll do so by pumping up the stock price and then rapidly selling shares. The ones that are usually hurt are average retail investors. So, when it comes to finding someone to follow, take your time and don’t just believe everything you see. Just like researching penny stocks, you should also research those who you want to follow in your trading career.

Use The Past To Your Advantage

Ever heard the phrase “history repeats itself”? Learn from market-wide lessons like the Dot Com Bubble or the Bitcoin craze. Observe how companies react to political news in the past in the event it happens again like Fed rates. Simple information like the overall historical movement of an industry can make or break a potential trade.

Penny Stocks & Paper Trading: A Good First Step

make money with penny stocks

A great way to approach penny stocks is through paper trading. Basically, it allows new traders to trade with no risk or money while they are still learning. You can take multiple approaches to paper trading. Some brokerage firms offer paper trading on their platforms, but it can be as simple as writing trades down with pen and paper.

Paper trading penny stocks brings great benefits to new traders. Such as exposing investors to new trading strategies, adjusting their risk tolerance, and commonly used penny stock terms. Even a month of paper trading can put you in a much better position compared to new investors. Though you won’t make money if you’re right, you also won’t lose money if you’re wrong.

Focus On Industries You Know And Are Interested In

Another common mistake that new traders will make is investing in companies that have been all over the news. Don’t just buy a stock because you heard about it once. You should always do your own research. Furthermore, if a company is all over the news, chances are you missed it on its way up.

Take what you know and like and use it to your advantage when trading. For instance, if you worked in the finance industry you most likely have a strong understanding of financial companies. You could even be a huge car fan and know almost everything about cars. Do not be afraid to take your knowledge into the market and make strong trades.

How To Find Penny Stocks To Buy

penny stocks to watch

There is no “one size fits all” when it comes to buying penny stocks. This includes how investors pick which companies to trade. As mentioned previously, an expert you follow may be looking at companies that catch your eye. Several trading websites or YouTube channels discuss what they are looking at and why. These are both great options to expand the list of companies you are interested in.

If you really think about it, you cannot keep an eye on every company. There are just too many. However, you can utilize things like penny stock screeners to find stocks that fit your personal criteria. Some trading platforms provide them along with their charting tools.

You can also find websites that provide free screeners to investors. There is so much more when it comes to penny stocks but hopefully, this gets you started on your journey.

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