What Are Penny Stocks?
The market for penny stocks has continued growing over the last few years. But what are these stocks in the first place? The general definition of penny stocks includes shares of companies trading below $5.
Making money with penny stocks can be challenging if you invest blindly and don’t take the time to learn how to trade. It may be simple to set up a trading account and start buying, but there is so much more involved when looking to make consistent profits.
Penny stocks are volatile and high-risk assets. So you want to learn how to day trade them while mitigating this risk the best way possible. It all starts with research. However, knowing the pitfalls of investing in these cheap stocks is essential to trading them. Many stocks under $5 can be prone to manipulation, most recently from things like private groups of retail traders on places like Reddit and other social media platforms.
How Do You Buy Penny Stocks?
One common question investors may have, “How do I buy penny stocks?”
The goal when investing is obviously to make money. But there are a few things you need to know before putting your hard-earned dollars into these cheap stocks. Since penny stocks trade for less than $5, the slightest price change can connect with a significant percentage change. For example, if a penny stock moves up $0.50, it is a much more substantial percentage change than a large blue-chip stock trading for $100.
Let’s use this example: shares of the Latin American brewing company Ambev (NYSE: ABEV) only need to jump about 25 cents to return a roughly 10% gain. If Anheuser-Busch InBev (NYSE: BUD), which has a controlling interest in Ambev, recorded a similar increase, it would have to climb over $6 per share.
The chances of a 25-cent move happening sooner than a $6 move are much higher. Looking at the other side of this, a 25-cent move lower can happen more quickly than the same $6 move lower. So the risk goes hand-in-hand with the potential reward.
Should You Day Trade Penny Stocks Or Invest In Penny Stocks?
You can do two types of things when looking for penny stocks to buy. There is long-term investing, and there is short-term trading. When investors go long-term, they don’t bat an eye at small losses or short-term sell-offs. They hold onto the assets, planning to stay in the position for years.
On the other hand, many want to day trade penny stocks. Day trading can often be a difficult feat without proper education. The volatility of these assets can make them extremely risky. But thanks to this volatility, a trading strategy can often be better than an investment strategy early on.
Some traders will also take on a “starter position” to “trade around.” This usually entails taking a tiered approach to trading and buying and selling along the way, all while holding a core position. As long as the overall trend is going in your favor, buying at interim lows and selling portions at interim highs can allow for a way to benefit in both the short and long term.
Learning technical analysis can help identify things like strong uptrends. A “tiered approach,” in this case, might entail holding a core, then buying at the “higher low,” selling a piece of the position at the “higher high,” and continuing the process. Despite the higher risk of trading low-priced stocks, plenty of penny stock success stories exist.
Penny Stocks & Success Stories
There are so many examples of penny stock success stories that I could not fit them into one article. One company that we can talk about is Viking Therapeutics Inc. (NASDAQ: VKTX). Shares of VKTX stock were roughly $2 back in June of 2022. Now the company has a stock price of over $16 a share. This is a prime example of how penny stocks can skyrocket and exit penny stock territory. This particular company blew up initially because of the growing interest in companies developing obesity treatments.
You’ve also got other biotech stocks that skyrocketed over the last year. Provention Bio Inc. (NASDAQ: PRVB) traded below $4 per share in 2022. As of March 2023, the former penny stock had attracted the interest of Sanofi (NASDAQ: SNY), who agreed to buy the company in a deal worth $2.9 billion.
Read More: 5 Penny Stocks That Turned $500 Into As Much As $84,525 In 15 Months
Also, who can forget the epic rise of GameStop (NYSE: GME)? In 2020, the company was compared to Blockbuster Video. Many investors assumed the pandemic put the final nail in the coffin. Fast-forward about a year, and it has become one of the most notable Reddit penny stocks in history, rising to a high of $483 from levels below $3 one year earlier.
With these penny stock success stories also come negative ones. As mentioned, these assets can quickly move up or down in percentages from small price changes. So it is important to know exactly how to day trade or invest in penny stocks.
Day Trading Penny Stocks: The Basics
Now you are wondering, where do you start day trading penny stocks? Before investing in any assets, you should probably learn the essentials. Knowing precisely what you are doing when investing will make this process much “easier.” The average trader entering the penny stock scene will lose more money than someone who conducts proper research.
Paper Trading
There are a few strategies that can help you. One of these is paper trading. Paper trading is a simulated trade that lets you buy and sell without using real money. While you won’t make the big bucks when you’re right, you won’t lose your hard-earned money when you’re wrong. Many services offer paper trading, which can be a great way to test your strategy before putting it to work in real-money settings.
Research
But what about the research part of trading or investing in penny stocks? Recent news and company filings are a great place to begin your research. Monitoring technical indicators can also be a part of research to help identify trends and whether a stock’s move is strong or weak. For example, the volume of these assets and the chart patterns can be helpful when looking for the best penny stocks to buy.
Protect Yourself With Stop-Losses
Using stop-loss targets is extremely important to remove some of the trading risks. If a stock falls below a specific value, shares will be automatically sold off with a stop-loss order. You wouldn’t want this stop loss to be near the entry price. You still want some room for a bit of volatility. But if you set your stop-loss (whether a physical or mental stop) at a critical technical level, you’ll also know your risk tolerance per trade. This is one of the things many traders forget.
It isn’t about how much you make. It’s about how much you avoid losing by taking on a defensive strategy. If your gains are wide-ranging (+10%, +60%, +20%, +6%), but you keep your losses consistently small (-$100, -$100, -$100, etc.), then you have a better chance of consistent profitability. Another way to look at this is limiting your losses can make someone with a low “win rate” profitable.
Read More: Penny Stocks & 16 Frequently Asked Questions For 2023
For instance, if you risk $1,000 and make $500, you’ve gained 50% on your money. But if the next three trades you make, risking $1,000, result in 3 losses of $100 apiece, you’re still profitable. Your “win rate” isn’t great, but your account is net positive with those four trades. It’s about making money with penny stocks, so keep this in mind.
Keep Your Penny Stock Basics In Mind
Day trading and investing in penny stocks are very different from investing in regular higher-priced assets. You will need to trust your strategy to succeed. The fear of losing too much can occur if you do not trust your process. So choosing companies properly is essential.
Those with strong financial backing, solid market history, and more than one reason for increasing tend to be the best penny stocks to buy. Remember, there is no problem with selling your position after making a profit; you don’t need to buy and hold forever. There is also no issue with adjusting your strategy as the market, world, and companies change over time.
Many people have gotten rich with penny stocks. It is a matter of patience and market strategy that results in reaching that goal, not luck. All in all, it is important to remember how high-risk penny stocks are. Knowing how to invest in and how to day trade penny stocks is vital knowledge to have.
Nothing states that you need to sell immediately after seeing profits as a day trader. Nothing also says you must hold a stock for more than six months or a year as a long-term investment. You can make money with penny stocks, and it is your choice as to what your strategy will be to get there.
Penny Stocks For Beginners
This is where your trading journey begins. Hopefully, you learned something new today that’ll be helpful when you’re out there looking for the best penny stocks to buy. Below, I’ve also included a list of articles that are good as Stock Market For Beginners – style information:
- Investing in Top Penny Stocks: Why, When, and How?
- Penny Stocks & Frequently Asked Questions From New Traders
- How To Day Trade Penny Stocks & 9 Important Strategies To Learn Now
- Can You Buy Penny Stocks In An IRA? The Answer May Surprise You
- What Does Volume Mean In Penny Stocks?
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