Getting Started With Penny Stocks: Learn To Fish Before Putting Bait On The Line
Updated January 17, 2021
Everyone knows that penny stocks are high-flying, high-risk stocks, with many movies made about them. Typically these movies involve some shady stockbroker looking to get people to buy penny stocks of worthless companies, sound familiar?
When the movie “The Wolf Of Wall Street” came out, it shined a very negative light on these low-priced stocks. While there are scenarios like this with penny stocks, the vast majority of small-cap and micro-cap stocks have real, underlying companies. It all comes down to finding the right penny stocks to buy.
So if you’re just getting started in the market and penny stocks are something of interest, it’s important to know some basics. The first of which is to learn first, then trade later. Going to message board sites like Reddit and seeing members flaunt massive winnings can be hard to ignore.
Maybe it was luck or, maybe it was experience that helped those users make money with penny stocks. At the very least, they had a general understanding before diving in, head-first.
Luck Is Your Worst Enemy With Penny Stocks
Penny stocks aren’t hard or expensive to buy. You can scoop up thousands or even millions of shares for less than $100 at times. This can make for a dangerous situation teaching or rather “training” a newbie to think of penny stocks like a lottery ticket. A good rule of thumb is to only risk what you can afford to lose.
But with penny stocks, because the upside can be so big, this leads to some people treating low priced stocks like a lottery ticket. “I’m ok losing $100 in exchange for possibly making $1,000” but it isn’t that easy either.
The “10x mentality” isn’t something that’s easily duplicatable. It’s like playing baseball and thinking you will hit a home run every time. Not only is loss a very real thing, if you get lucky a few times, it almost trains you to think you’re good at trading, when, in fact, but you may also have just gotten lucky. My point is this, learn how to trade before jumping in. An educated trader not only can make winning trades but they also understand how to avoid or mitigate losses.
If you got all-in every time, there’s a higher likelihood of going “all-out”. Getting your account completely wiped out is a tough pill to swallow. With penny stocks come a lot of risks and if you don’t know how to manage your trade, it will be difficult to deal with trades that don’t end up working out. And if all you know is “I either make money or lose it all,” you may be better off going to the casino and playing slots.
What Are Penny Stocks?
Right now you may be a bit confused as to why we would start with something other than the definition of penny stocks. I’m here to tell you that the important things come first. While the penny stock definition is important, it isn’t as important as saving someone from jumping right into trading penny stocks. So if you’ve made it this far, then you understand that trader education is one of the most important things you can invest in right now.
As far as what a penny stock is, there are multiple definitions depending on who you ask. According to the Securities and Exchange Commission, penny stocks are equities that trade below $5. Ask some day traders and they’re more likely to tell you that penny stocks are equities trading below $1. No matter your definition, if you understand how to actually traded penny stocks and make money, you’re doing good.
Where Can You Find Penny Stocks
Like most things, all stocks (regardless of penny stocks or blue-chips) trade on different exchanges. While many day traders will say penny stocks only trade on the Over The Counter or OTC exchange, that isn’t 100% true. A majority of penny stocks trade on the OTC but there are thousands of others that trade on the NASDAQ, New York Stock Exchange. There are also penny stocks trading on the CSE, TSX, and other global exchanges.
It’s important that you know which exchange a penny stock trades on. That’s because it can determine if you’re even able to buy certain penny stocks or not. For instance, a popular trading app, Robinhood, doesn’t allow access to OTC penny stocks.
But if you wanted to buy shares of a NASDAQ or NYSE penny stock, you’ve got full reign. In addition to that, most of the popular online brokers like E-Trade, TD Ameritrade, and Fidelity may have certain restrictions on trading international penny stocks. So once you research certain penny stocks to buy, you’ll want to be sure you can actually purchase them with your broker. There’s nothing worse than doing research just to find out you can’t act on it.
Learn Paper Trading With Penny Stocks, First
If you’ve gotten comfortable with the education portion of penny stocks, it’s time to formulate some strategies. Instead of risking your hard-earned money on testing unproven strategies, you may want to try paper trading first. When it comes to paper trading penny stocks, it’s as simple as asking your broker. You can also find an online website that lets you make a free account for paper trading.
The practice is essentially a way of utilizing real price reporting and trading with fake money. You may be wondering what the benefit is if you can’t make money with penny stocks that you paper trade. The benefit comes when you don’t lose money if you make a mistake or find a hole in your strategy.
Practice makes perfect in the market especially if you build a sound strategy that hinges on things like clear chart patterns, technical indicators, and fundamental metrics. If you can duplicate a winning trade over and over again with the same strategy, you probably have a good plan outlined. At this point, you might feel comfortable testing it on a small scale with real money. But just like paper trading, treat your real money strategy the same.
It’s very easy to get caught up in a greedy mindset especially if your system worked and you’re making money with penny stocks. But just like with all things, if you take profit and the stock continues higher, you can always buy back in if your strategy is still intact. On the flip side, you can also always find other penny stocks to buy.
How To Make Money With Penny Stocks
If you’ve educated yourself, put together a sound strategy, tested that strategy multiple times, paper traded with winning trades and come to the mental conclusion that there are rules to follow, it’s time to start making real money. While buying and selling are easy, there are other ways to leverage your trading strategy.
These include advanced charting methods, tiered trading strategies, and even making money when stocks go down. This article is written to give you a general introduction to penny stocks. But I’ve also created an entire curriculum with numerous basic and advanced courses to teach you how to make profitable trades.
I’d like to share this with anyone reading, for free. If you’re just getting started with penny stocks, options, and even blue-chips, this is something you’ll want to check out. These lessons are guaranteed to make you a more profitable trader and have the potential to literally change your life.
About The Author:
Michael Edward is a former hedge fund trader. He received a Trader of the Year Award in 2008 and is currently the Head Trader for https://TrueTradingGroup.com.