Penny stocks are a popular investment option for those looking to make a quick profit. However, trading these cheap stocks can be risky and can take a significant amount of research and knowledge. In this article, we will discuss the basics of buying penny stocks and provide tips on how to make money with them, including five trading strategies you can use almost immediately.
What are Penny Stocks?
Penny stocks are stocks that trade for less than $5 per share. These are usually issued by small companies. While many are not listed on major stock exchanges, there’s no shortage of NYSE or NASDAQ penny stocks. Because of their low price, they are also inherently high-risk investments.
How to Buy Penny Stocks
Before buying penny stocks, it’s important to understand the risks involved. Cheap stocks are often subject to manipulation and fraud. Many companies with shares trading at these low levels can be financially unstable. This opens the door for higher rates of failure.
If you’re looking at penny stocks listed on the Nasdaq or NYSE, that can also mean the risk of delisting. Those using mobile trading apps like Robinhood or Webull could face some issues.
Many stocks that get delisted go to the OTC and, as a result, may be restricted from access on such apps. Understanding these risks can help you better formulate a trading style when it comes time to put together a list of penny stocks to watch.
– Why Some Investors Choose Penny Stocks Over Blue Chips
Steps To Buy Penny Stocks
Speaking of brokers, when it comes to buying low-priced stocks, you will first need to open a brokerage account with a firm that specializes in trading penny stocks. Many online brokerages such as E-Trade and TD Ameritrade allow you to trade all penny stocks, for example.
Once you have opened a brokerage account, it’s time to fund it. Generally, most traders will only risk what they can afford to lose. The final decision is yours to make. Once that’s done, you can start your search for penny stocks to buy. You can use online stock market databases, trading platforms, a slew of scanning and screening tools, and even social sentiment to find stocks that may be worth watching.
When searching for penny stocks to buy, it’s important to research the company and discover why its stock is moving. Is it based on speculation? Are there news headlines prompting a move? Or is it something like sympathy sentiment based on other stocks, which is behind a breakout or breakdown. Talking to a financial advisor or professional before buying stocks, in general, is also a good idea.
5 Ways To Make Money with Penny Stocks
Penny Stocks Trading Strategy #1: Identifying Breakout Patterns
One important strategy for penny stock investing is to keep an eye out for stocks trending upwards. These situations can often lead to short squeezes. This can happen when buying pressure outweighs the pressure from investors shorting the stock. If you can identify a stock experiencing a short squeeze, the potential profits can be substantial. They also tend to carry more risk due to higher volatility and speculation.
Additionally, looking for penny stocks that have recently hit new lows can be beneficial. A stock may experience a significant drop due to poor earnings or negative analyst reports. However, these stocks can also have the potential to bounce back and experience substantial gains.
Penny Stocks Trading Strategy #2: Analyzing Price Action
Another important strategy is to focus on the price action of a stock. This involves analyzing the stock’s performance over time. You can look at its support and resistance levels and moving averages. By familiarizing yourself with price action analysis, you can develop new strategies and identify patterns that may have previously gone unnoticed. It’s also a great way to learn more about the stock market and trading in general.
Penny Stocks Trading Strategy #3: Use Chart Patterns To Your Advantage
You can also make money trading penny stocks by looking at chart patterns. Although it isn’t a guarantee, chart patterns, such as the head and shoulders chart pattern, cup and handle, trend lines, and even a bear flag chart pattern, can give technical traders an advantage.
However, it is essential to note that chart patterns should be used in conjunction with other forms of analysis if you’re newer to trading. A bit of fundamental analysis can help determine what type of follow-through a stock might experience.
Additionally, interpreting chart patterns can be subjective, and one trader’s interpretation may differ from another’s. Therefore, traders need to have a solid understanding of technical analysis and chart patterns before using them as a basis for trading decisions. If you’re new to trading penny stocks using charts, check out some of our Chart School posts:
- Penny Stocks Chart School: Descending Wedge Defined
- How Do You Analyze Penny Stocks? Start With These 5 Chart Patterns
- Penny Stocks Chart School: Ascending Triangle Defined
- How To Use Penny Stock Charts
- Penny Stocks: Technical Analysis Tips for 2023
Penny Stocks Strategy #4: Identifying Stocks with Irregular Price Spikes
When it comes to investing in penny stocks, it’s important to look for stocks that are already showing signs of momentum. There are a few ways to find these types of stocks. One approach is regularly checking penny stock scanners designed to identify irregular price moves. This can provide a starting point for your research and analysis.
These tools can help you narrow your search and focus on stocks experiencing an upward trend or gap up early in the day. Remember that what may be considered “relevant” will depend on your preference and trading strategy.
If you notice a stock in an uptrend, it may be worth adding to your list of penny stocks to watch. Pre-market momentum coupled with supportive technical analysis can indicate a potential breakout. However, it’s important to remember that this is a starting point and not a guarantee of future success.
Penny Stocks Trading Strategy #5: Thorough Research is Key
When trading penny stocks, volatility can result in significant losses if not approached with caution. To mitigate risk, it’s important to research situations in the stock market before making any trades. This includes staying informed about the overall market, keeping track of recent company news, analyzing financial statements, and studying industry trends.
The more in-depth your research is, the more sound your investment thesis might be. A wealth of information is available to help you make sound investment decisions. Staying up to date on market trends and company news can give you an edge. One example is when a penny stock releases positive news. Its stock price might skyrocket. If a company you’re interested in is in a growing industry, something may happen that attracts more investors to the stock. This is what we’re looking to capitalize on as investors.
You’ll become more proficient in identifying valuable information versus fluff as you conduct more research. You’ll discover which data types are more relevant to your strategy and how to use them to your advantage.
Penny Stocks & Trading Strategies For 2023
You’ll also want to understand other nuances of trading penny stocks or higher-priced stocks in general. If you’re new to cheap stocks or want to get some additional insight, check out some of these articles below:
- Buy Penny Stocks Like Hedge Funds Do: A How-To Guide
- Making Profits With Penny Stocks, Beginners Guide
- 10 Secret Ways To Find The Best Penny Stocks To Buy In 2022 [Updated]
- Trading Options 101: A Beginner’s Guide
- Penny Stocks: 7 Day Trading Strategies for Beginners
- Are Penny Stocks Good For Beginners? [Answered]
- New Years Penny Stocks Trading Advice: 3 Tips
- What Are Penny Stocks? A Beginner’s Guide To Making Money Trading
New To Trading Penny Stocks?
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