Interested In Penny Stocks? Knowing How To Buy Them Is Important

Before we tackle how to buy penny stocks, first, let’s define them. Ironically, a penny stock is not just a stock whose share price is around a penny or even under a dollar, for that matter. Penny stocks are low-priced, small-cap stocks with a share price under $5, as defined by the Securities and Exchange Commission (SEC).  

There are penny stocks that trade outside of the major exchanges, and many often trade over-the-counter (OTC) through the OTC Bulletin Board (OTCBB) and pink sheets. However, many companies trade below $5 per share on the main exchanges like the Nasdaq and NYSE. You should be aware that with OTC penny stocks, the reporting requirements are much less strict than those of the major exchanges. They also tend to lack the same liquidity as their “listed” cohorts.

They may also be limited to accessing them from brokers. Robinhood and Webull, for example, don’t usually allow access to stocks trading outside of the Nasdaq and NYSE. There are a few exceptions in certain instances. In general, the chances of finding OTC penny stocks on Robinhood are slim to none.

Are Penny Stocks High-Risk?

Now that we’ve covered the basics of penny stocks, how can you buy them?  Just like any other stock, you purchase shares of penny stocks through your broker. We talked about Robinhood and Webull above. They’ve become increasingly popular with new traders for their simple and easy way to day trade. The lower fees and promises of free shares when signing up are also perks that have attracted users.

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But there are plenty of others as well. If you’re looking for the best penny stock brokers for trading and investing, you’ve got a few things to consider. Not only do fees matter, but execution times and access to tools are also important. Fortunately or unfortunately, many mobile apps or mobile versions of desktop platforms have their limits. Looking at brokerages like TD Ameritrade and ETrade, their “pro” trading platforms are much more advanced on a larger device.

Are Penny Stocks Too Risky?

They also offer many other things like streaming news, scanning tools, and charting, among other things. At the end of the day, it’s completely your choice on how you want to access the markets. I will say that the quicker you can execute a trade, the better off you may be.

The idea of trading is great, but you can’t forget that there are risks that go along with the potential rewards. This is due, in part, to volatility. These types of stocks are well known for huge runs and big drops. The percentage gains and losses can come about even with the slightest shift in price. Since we’re talking about stocks under $5, even a 50 cent move in price can equate to a sizable change to your profit or loss. 

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Other factors that can impact the risk of investing in penny stocks include low liquidity, lack of reporting information, and of course, spam or “pumps.” Thanks to the surge of interest in penny stocks on Reddit, Twitter, Facebook, and even TikTok, social sentiment is becoming a driver of momentum. While you might hope that everyone online is telling the truth or discussing factual information, many aren’t. We’re talking about making money with penny stocks, and the hype is something to understand. Touting companies isn’t a new practice. As a trader, it’s vital that you understand not only the source and legitimacy of the hype but also what comes next.

Think about if the hype dies down. Is the company you’re buying into going to be able to sustain growth. If you look at some of the bigger hyped-up names during the meme stock craze, you’ll get a clear view of what can happen when excitement takes a pause. Stocks including GameStop (NYSE: GME), Express (NYSE: EXPR), Nokia (NYSE: NOK), and Koss Corp. (NASDAQ: KOSS) were among the long list of penny stocks on Reddit that exploded earlier during the trend. Look at nearly all of them right now, and they are all well off of their record pandemic highs.

Trading Penny Stocks

Volatility and hype can dramatically impact these companies. Understanding a company’s underlying business and financials is important. That’s because it can help point out fundamental risk factors to avoid down the road. Finding a company with real and sustainable business operations is key.

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Just like any other stock, a penny stock’s financials are a big tool for investors. In this case, quality is key. Companies might not be profitable, but if they have a clear path to revenue generation and an outlined model for sustainability, the chances are that you’re looking at more than just a stock that’s the center of social media attention.

We’ll see this in many biotech penny stocks. Since they’re in different stages of pre-commercial development, there aren’t many revenue opportunities without commercialization. But progress in things like phase trials and leading investment from larger companies can justify reasons to keep focused on a company. In the short term, they may be raising money to put toward operations, which can create dilutive events in the stock market. Because of this, it may be better to trade penny stocks than immediately invest in them.

Are Penny Stocks Worth It?

Simply put, most investors have concluded that the reward is worth the risk. There is certainly a reason that penny stocks remain a popular choice among a daring group of investors. They have the potential to deliver massive returns. The saying is that with high risk comes high reward, and it certainly applies to cheap stocks.

But remember to do your research and understand why these stocks are moving the way they are. Is the move sustainable? How long do you plan on holding shares? Are you day trading or looking to invest in penny stocks? At what level are you looking to take profit or cut losses? No matter what, have a plan. Determining whether penny stocks are worth it or not depends heavily on you as a trade.

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