Do You Know How To Buy Stocks & Make Money?
This is a question we get more frequently than you might think. So you ask, we deliver. Several of our readers had the question, “How do I buy penny stocks?” It seems like a pretty easy answer but there are other things that go into it beyond simply hitting a button to buy. What I mean by this is that in order to buy penny stocks and be profitable, there are certain strategies to put to work and certain things to understand that could actually save you money in the long run.
Step 1: Understand the Basics of Penny Stocks
You’ll want to have a good grasp on what penny stocks are. Understanding the basics and understanding the risk/reward can help in the long-run. Most of the time, new traders will lean toward penny stocks because they think it’s easy to make quick money. While it is simple in strategy, it is not as easy as you may think.
In our Intro To Penny Stocks Book (download for free on pennystocks.com), we talk about risk vs reward. All investments carry a certain level of risk. But when it comes to lower-priced equities, the risk can be much greater; but so can the reward. Think of this as an example: If Apple were to jump $1 a share, that “gain” would be hardly recognizable. But if something like Fannie Mae were to jump by the same $1, you would record a significant windfall.
Similarly, if Apple declined by a dollar, you wouldn’t really notice. But Fannie Mae on the other hand, that $1 drop would hurt. So, it’s important to understand which penny stocks to buy and why you’re buying them. If it’s “because someone told you to,” look for a better reason. Maybe the company had news that acted as a catalyst or maybe the company’s coming out with earnings that you think will be bullish.
Those are good theories but please don’t buy penny stocks just because someone told you to. If your interest is piqued because someone said to look at a certain stock, great. But now it’s up to you to do the research and decide if it is, in fact, a penny stock to trade.
Step 2: Find A Broker
Before you can even buy penny stocks, you’ll need a broker. Some of the best penny stock brokers out there will clearly show their fee schedules from the start. It’s best to find brokers that allow you to trade penny stocks on your own without having to call in. While 100% of the responsibility will fall on your shoulders, timing won’t be as big of an issue. Think about it.
If you had to look at the market, find a stock that was running, pick up the phone, dial the broker’s number, wait on hold, discuss the trade, hang up the phone, and then wait for the broker to place the trade, that takes a ton of time. When seconds matter, you want to be able to find a penny stock to buy and then immediately place a trade when YOU are ready. Waiting on someone else to trade takes the control partially out of your hands.
[Read more] Best Penny Stock Brokers For 2020
You’ll also want to understand the fee structure. How much will it cost you to trade penny stocks? Some brokers may not have trading fees, per se, but those same brokers may have special stipulations when it comes to buying low-priced stocks. I know a few of these online brokers that allow penny stock trading will charge fees to trade OTC penny stocks, for example. So be aware of the fee schedule when looking for the best brokers for penny stocks.
Step 3: Have A Strategy To Trade Penny Stocks
Once you understand the penny stock basics and find a good broker, it’s time to build a strategy. Like in step 1, you should never trade solely on the opinion of someone else. Even though they may be correct, you’re not learning how to trade at all. If that “guru” isn’t around when the market’s hot, you need to be educated enough to understand how to trade penny stocks on your own. In this case, using your broker to paper trade is a good starting point to testing different strategies.
By paper trading penny stocks, you can avoid material losses while perfecting winning strategies. Even though you won’t make money when you have a winning trade, you won’t lose it either. Though it can be discouraging if you make profitable trades, use paper trading the same way you would real money.
When you feel comfortable, start getting your feet wet with real money trades. But be cautious and remember the basics. Also, keep in mind that headlines can play a big role in the movement of certain penny stocks. Now more than ever, we’ve seen headline risk play a big role in penny stocks & the broader markets alike.
Step 4: Placing A Trade
When selling or buying penny stocks you’ll want to know how to execute quickly and effectively. You’ll also want to be aware of the types of trades you can and can’t place. While brokers may differ in this aspect, let’s talk about some of the basics.
First, when it comes to NASDAQ/NYSE listed stocks, for instance, you can buy using a market order and limit order. In the case of a market order, you essentially say to the broker “I want to buy now no matter the price; whatever the market is offering.”
This can get you an immediate fill (purchase) and you’ll own shares relatively quickly. For volatile stocks, however, this could be good and bad. It could be good if the stock just swung lower for a brief moment and you got your order filled as it bounced back higher. It could be bad if you get filled “at the market” and the volatile swing goes lower.
On the other hand, placing a limit order will allow you to pay the price you want. Sometimes your limit may be too low and you won’t get filled. Other times you can pay exactly the price you value a penny stock at and hopefully that is a discount to where it moves after you buy.
Each method has its pluses and minuses. So situationally, it’s up to you to decide. When it comes to OTC penny stocks, some brokers only allow limit orders for buying. When it comes to selling penny stocks, most brokers if not all, will allow you to market or limit order no matter the exchange a stock trades on.
Step 5: Making Money With Penny Stocks
Anyone can get lucky trading penny stocks. But it takes skill and discipline to consistently make money with these cheap stocks. While every trade won’t be a winner, protecting your capital and having a plan is very important. I’ve seen plenty of traders take their entire account, place it into a single trade at a single price and say YOLO.
In my opinion, that’s just as good as playing roulette or buying a lottery ticket. The fact that this is an investment means that a proven strategy can give you better chances of becoming successful. That is, of course, in comparison to a lottery ticket or “betting on black or red”. Also understand that most penny stocks (most) have a short lifespan.
For instance, the typical breakout rally for certain sector stocks may tend to last 3-4 days at most. In this example of ABCD sector stocks, unless you’re planning on investing for years to come and don’t care about big portfolio fluctuations, the ideal action may be to trade ABCD sector penny stocks versus hold for the long term.
If you find a “great” penny stock to buy, you’ll also want to know current events that could change or push up the current trend. For example, if you buy an oil and gas penny stock, you’ll want to monitor certain reports as these results can boost or break down certain stocks. While this is just a very basic overview, you can get more detailed information here.