trading penny stocks for beginners faq

Learn The Basics Of Making Money With Penny Stocks

Investing in penny stocks is not as difficult as people think it is. With a little help and the right direction, figuring out how to properly trade or invest in penny stocks can be a fun, easy, and profitable process.

This introduction to trading penny stocks has been developed specifically for the beginner penny stock trader. This article will teach you some of the basics of buying penny stocks as well as selling them.

This article will cover the following basics:

  1. What is a penny stock?
  2. Where to open a trading account
  3. How to open a trading account
  4. How much a trading account is funded, on average
  5. What types of basic orders can be placed

What Is A Penny Stock?

To really dig into this introduction, you should understand what penny stocks are.  According to the SEC, the definition of penny stocks “generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.”

Typically, these stocks are highly speculative with many companies not having significant operations. Depending on the exchange – NASDAQ, NYSE, OTC – there may be little or no reporting criteria.  However, due to the speculative nature, this generally entails higher levels of volatility. Therefore it opens up an opportunity for larger gains in a very short period of time compared to “blue-chip stocks“.

Where Can I Open A Penny Stock Trading Account?

Now that we have the pleasantries out of the way and you know the risk/reward of penny stocks, if you’re still looking to trade, you’ll need to open an account. Make sure it’s with a broker that offers the ability to buy penny stocks.  For this, we’ve found that it’s much easier to open an account with an online broker compared to traditional brokerage houses. That’s for 2 reasons. 

First, many of these traditional brokers don’t accept requests for day trading penny stocks. Second, the time it takes to pick up the phone, reach a live broker, place the order and then have it executed is far longer than it would take to execute a trade with an online broker.

Here are several top penny stock brokers (in no particular order) that allow you to trade stocks under $5:

  • Interactive Brokers
  • WeBull
  • Lightspeed
  • Robinhood

How Do You Open A Penny Stock Trading Account?

The sign-up process is similar in most cases.  The sites will ask you to fill out a secure form that includes personal financial information and risk assessments to qualify your account.  Once approved, you’re one step closer to trading penny stocks.

How Much Should I Fund My Penny Stock Trading Account?

Funding amounts vary but most brokers no longer require a set minimum. For instance, you can open up an Interactive Broker or WeBull account with a few hundred dollars.  However, on average, the typical opening amount that allows someone to be defined as having the ability to day trade, by law, is $25,000. Now, you may be saying, “I want to trade but I don’t have an extra $25 grand available!”

In this event, there are still brokers that will allow you to buy and sell penny stocks but you’re limited on the number of trades you can make.  Specifically, you’ll be limited on single-day trades (usually buying and selling a security the same day). If you don’t have the minimum $25k, you can only make 3 “round trip trades” within a 5 day period. If you make more than 3 round-trip trades in that time, you could be identified as a Pattern Day Trader.

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In this case, you might be restricted from making day trades for 90 days, by your broker. Round-trip means buying and selling the same stock will count as a trade. If you buy penny stocks “today” and sell them “tomorrow” that doesn’t count as a day trade.

Trading Penny Stocks With A Smaller Account

This is why some traders with smaller accounts chose to buy penny stocks toward the end of the day and sell them the next morning depending on the trend. On the other hand, you could also do a “cash account”. While you won’t be able to make larger trades using margin, most brokers won’t limit your day trades. That means you can theoretically place 4 round-trip trades in a single day. The only thing that limits you is the amount of settled funds in your account.

For example, let’s say you have $5,000 in your account and you get into a $3,000 position “today”. Later “today” you sell that position for $4,000. Typically, proceeds from a stock trade settle out at what’s known as “T+2” meaning after you sell, you’ll be able to trade with that cash in 2 days from the “trade” day. Going back to our example, “today” you essentially made $1,000 ($3k principle, sold for $4k nets you $1k profit). But “tomorrow” you’ll only have $2,000 trade with since your original starting amount was $5,000.

There are ways to trade without “breaking the bank,” just know that each broker will vary in what they will allow you to. You should consult the broker individually in order to find out what they offer with smaller accounts.

What Types Of Basic Orders Can I place?

penny stocks to buy sell

You’ve figured out what penny stocks are, you’ve picked out the best penny stock broker, you’ve gotten your account approved & funded, now you’re ready to place your first trade. How do you do this?  In the penny stock markets, most brokers will require you to place what is called a “limit order.” This is placed by setting the highest price you’re willing to pay for a given security and then waiting for someone to fill your order.  Granted, this may or may not happen every time. 

If a penny stock is moving up fast, a lower limit order may quickly get bypassed as the stock skyrockets.  So in cases such as these, a higher limit may need to be set in order to have a chance at buying penny stocks at optimal prices. 

On the flip side, if there is a consistent market trading the penny stock, a limit order can be placed at the lowest asking price or you can elect to offer the highest bid price and wait for someone to sell shares to you. This is similar to a standard auction.

I Can Buy Penny Stocks; What About Selling?

When it comes to selling, you can use the same ideology above to sell with a limit order or some brokers also offer the ability for penny stocks to be sold using a market order.  In the case of placing a market order, you’re basically opening yourself up to the market’s best price. This may give you an easier exit but won’t necessarily offer the highest amount of profit.  Consult your individual broker before making any buy or sell orders and ask about the types of order processing they offer for penny stocks.

This is just the beginning of your penny stock trading journey.  Hopefully, this helped you get started on the right track to figuring out your taste in penny stocks.  We’ll be offering many more articles on getting started in this market and more importantly, help you learn the ins and outs of penny stocks. So make sure to subscribe to this site, download the 60+ page eBook, and follow on Twitter, Facebook & Instagram so you don’t miss any of our important and information-packed articles.

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