Are Penny Stocks Worth it?
The term penny stock means any stock that is trading under $5. Because this definition is so loose, there are thousands of stocks to choose from. In 2021, investors have become enamored with the idea of day trading as retail investing has turned mainstream. Often, people will ask, “Can I make a living trading penny stocks?”
The short answer is yes.
But, this also depends on a lot of different factors. The two most important are time and education. There’s no shortcut around educating yourself about penny stocks. If you don’t understand price action, factors that can lead to price changes, and other important insights, you could end up losing your principle investment.
Additionally, the penny stock traders who profit the most, often tend to be the ones putting in the most time. This means making a watchlist on a weekly or even daily basis and sticking to it. Also, one of the biggest ways that traders end up losing, is by trading with emotion.
Ask any pro trader and they will tell you that it is extremely important to stick to a plan. This means understanding your entry and exit strategy for every position. By setting intraday price targets and taking profit, investors can maximize their chances of seeing returns.
Over the past year, several up-and-comers such as Gamestop Corp. (NYSE: GME) and Zoom Video Communications Inc. (NASDAQ: ZM) have shot up by triple-digits or more. While these are somewhat anomalies, we do see gains like this with penny stocks. So with all of this considered, let’s take a look at how realistic it is to make a living trading penny stocks.
How to Make a Living Trading Penny Stocks
- How to Pick a Penny Stock to Watch
- Trading Penny Stocks & How to Profit
- How Much Money Do You Need to Start Investing in Penny Stocks
How to Pick Penny Stocks to Watch
Picking penny stocks to watch involves a careful balance between speculation and fundamentals. Some traders prefer one or the other or a combination of both, and it is very important to understand the difference. Fundamentals are quite self-explanatory. These involve the underlying business of a company. This could include everything from revenue and profitability to cost of revenue, EBITDA, and more. These numbers are always included in a company’s required quarterly and annual operating results. Using fundamentals can be the key to identifying how a company will do in either the short or the long term.
For example, if a company shows quarterly revenue growth, it could be worth watching. However, if it has much more outstanding debt than cash on hand, it could be considered riskier. On the other hand, if a company has little to no debt, high cash on hand, but low revenue, it could also be worth watching. It’s important to use this data to craft a complete financial picture of a given penny stock.
On the other hand, we have speculation. Speculation means outside factors that are affecting the share price of a company. This could be news, the anticipation of upcoming earnings, or a Reddit forum discussing a company that causes it to trend that day. Speculation is often a key aspect of day trading in penny stocks. And, it’s easy to keep up with all of the news in circulation through outlets like PennyStocks.com and trading platforms like ThinkorSwim. So as you can see, there is a careful balance between fundamentals and speculation that will ultimately affect the price of certain securities. If traders can identify these movements early and what causes them, the potential for profitability could become much higher.
Trading Penny Stocks & How to Profit
Making money with penny stocks is often easier said than done. When first starting out, it might seem simple. Find a trending or almost trending company, and hope that it goes to the moon. While this may work a few times, ultimately it will lead to losses. In addition, novice traders can get greedy with their positions, and that greed will eventually get the best of them.
For example, say you’re up 30% in a position. This is already a fantastic return, and at this point, profit should have been taken at several milestones along the way. However, oftentimes investors will get greedy and continue holding in hopes that it will keep climbing. But with penny stocks, large price shifts can often be short-lived and lead to even larger declines. This will have novice traders holding onto their positions, hoping to try and make some of their money back. And as we see, this is hardly the case.
So to avoid this and make money trading penny stocks, investors need to have a carefully thought out strategy. Some of the best traders in the industry will tell you to make a game plan and stick to it. This could mean taking profit as a stock reaches certain price targets throughout the day or the week.
How Much Money Do You Need to Start Investing In Penny Stocks?
This is a difficult question to answer off the bat because it all depends on the individual investor. But, there are a few ways to think about this question. Let’s talk about one example that investors often use. Let’s say that you make a solid 20% return in a single day. If your portfolio has $1,000, you’d walk away with $200. However, if you have $10,000, you’d clear $2,000 that day. So as you can see, it’s all about scale. The more capital you have, the more money you can stand to make. But, it’s also important to consider risk.
Unless you’re watching your portfolio with an eagle eye, it’s best to consider certain investments as calculated gambling. So if you’re able to lose that same $2,000, then it could be worth risking more capital. However, if you’re trying to make enough profit to pay rent, it might not be the best choice to invest all of your savings. While ideally, a trader would start with around $10,000, $1,000 could work as well; it’s all about how much you are personally willing to risk.
Are You Ready To Start Trading Penny Stocks & Making Money?
If you’re ready to make money with penny stocks, it’s time to start learning how to do just that. Take some time to understand how the market works, why psychology can play a large role, and figure out if you’re a trader, an investor, or something in between. To help with this, we’ve got a few other articles that you can reference: