3 Things All Penny Stock Investors Need to Know 

Investing in penny stocks is hard. And, making money with penny stocks is even more challenging. But, for those who are determined and willing to do the work, it can be very worth it. Now, there are a few things that all those who want to invest in penny stocks need to know. And we’ll get into that in great detail. However, now, investors need to understand the current trends. 

First, we have the effect of social media on the entire stock market. With Robinhood and Reddit working in tandem to support retail investors, finding and buying penny stocks has never been easier. 

However, finding penny stocks on Reddit and Robinhood can have ups and downs. On the one hand, these cheap stocks tend to be highly volatile. This is due to the nature of stocks under $5 and the intense speculation. But, using social media to find penny stocks for your watchlist can be a great tool if you follow the next step. 

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The next step is research. We cannot stress this enough. Research will always be the core difference between a profitable and unprofitable portfolio. This is something that all pro traders will tell you is arguably one of the most critical steps. So, with these two things in mind before we go any further, learning how to invest in penny stocks can be an enjoyable experience. If you’re debating it, here are three things you need to consider. 

3 Things to Know When Investing in Penny Stocks 

  1. Getting a Trading Education 
  2. Understanding Volatility as an Advantage 
  3. Creating a Penny Stock Watchlist

1. Getting a Trading Education 

One of the most valuable things any trader can do is educate themselves on how to trade penny stocks. This ties into the research stage; however, there are some nuances. For one, a trading education takes time.

Yes, it includes understanding the basics, but there are more advanced factors to consider. This could be anything from trading patterns and knowing how to enter and exit a position, as well as others. In line with this, traders need to know what type of traders they are. 

getting a trading education

For example, looking at daily technical indicators may not be necessary if you only intend to buy and hold long-term positions in penny stocks. However, if you wish to swing trade or buy and sell penny stock quickly, using these indicators will be crucial to trading. Understanding what makes the market and specific penny stocks go up and down is extremely important. 

And plenty of online resources allow you to get a trading education. Beware that this is not a five-minute process. Learning the ins and outs of buying penny stocks takes time and dedication. You wouldn’t trust a surgeon who learned how to perform surgery in a few days? So why would you trade without knowledge of what to look for?

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2. Understanding Volatility as an Advantage 

Volatility is one of the main benefits that penny stocks can offer. Because stocks under $5 move up and down frequently, many traders use these securities to capitalize on short-term gains. However, on the other hand, volatility can be a significant downside for those who don’t know how to use it. When first trading penny stocks, it can be easy to watch your portfolio go from green to red quickly. 

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Most new traders lean toward the largest movers of the day or popular penny stocks on Reddit or other social media sites. However, this puts you at a major disadvantage to traders that know how to use volatility and what to look for. 

volatility penny stocks

So, what do you need to look for when using volatility as an advantage? Well, the number one aspect to consider is speculation. Speculation is a somewhat all-encompassing term that describes any external factor affecting a penny stock. This could be news, press releases, balance sheets, industry-wide announcements, or anything similar. 

While we like to think that penny stocks trade on fundamentals alone, in reality, speculation accounts for most of the moves that a penny stock will make. Because of this, having access to real-time news software will always be your best friend. In addition, investors can look at the industry a penny stock is in and see what that specific market is doing in the present and the future. This is the best way to avoid unexpected moves in your portfolio. 

Additionally, investors should understand a wide range of technical indicators. This plays into the section above on having a trading education. So, if you combine technical indicators with an understanding of speculation, finding penny stocks to buy can be easier than previously imagined. 

3. Creating a Penny Stock Watchlist 

penny stock watchlist

We’ve covered this topic numerous times in the past few months. But, if you’re unfamiliar, let’s take another look. Creating a penny stock watchlist is the best way to prepare yourself for trading. While it may sound complicated, there are a few techniques to make the process as easy as pie. The first is setting up a scanner. 

This can be done on popular trading platforms like ThinkOrSwim and via online resources as well. Investors can input information on different trading platforms, such as volume, long-term trends, industry, technical indicators, and more. This will then spit out a list of stocks based on your parameters. 

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Are Penny Stocks Worth It?

All of this information is only helpful if you put it to use. Learning how to trade penny stocks will be the best way to avoid losing money in your portfolio. However, because penny stocks are so volatile, there is always a chance to do so.

And while penny stocks have gotten a bad rap over the past few decades, the reality is that there are plenty of valuable companies under $5 out there. However, knowing how to find them and which ones are worth it is up to you. 

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