Featured Penny Stock Basics Terminology

What Are Penny Stocks – Definition & FAQ

What Are Penny Stocks & How Can You Make Money Day Trading Them?

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What are Penny Stocks?

ANSWER: Penny stocks are shares of companies that are trading for less than $5 a share.

There are many out there who decide to make their own definition. But according to the Securities & Exchange Commission, this is the basic definition of penny stocks and you have to admit it is pretty simple.

Can You Make Money With Penny Stocks?

Another frequently asked question is “Can you make money with penny stocks?”

ANSWER: Yes, you can make money with penny stocks, there are some things you need to do if you want to be consistently profitable.

For newbies, day trading penny stocks takes time to master. It’s easy to simply open and fund a trading account. The sad part is that a vast majority of people starting to day trade penny stocks lose money more than they make money for 1 reason: inexperience.

If you wanted to become a professional coder, how would you start? Would you download an app like Dreamweaver and decide to start writing code? Most likely not. The logical starting point is getting educated first.

At the end of the day, anything you want to make money doing takes time to learn. You start with the basics then expand your skillset to advanced methods.

So why should day trading be any different? The common misconception is that it’s as easy as playing slots or gambling at the blackjack table. The fact is that you can make more money and become consistently profitable day trading penny stocks, than playing blackjack, it just takes a little time and education. Learn how to day trade penny stocks before opening up an account and putting money into it. There are even ways to start with a simulated trading account and use fake money to practice with and hone your skills.

How Do You Buy & Sell Penny Stocks?

This is another common question: How do you buy and sell penny stocks? There are certain methods for day trading penny stocks, and I’ll cover some of the details right now. When it comes to the actual process of buying and selling, the actions are simple.

ANSWER: You buy and sell penny stocks by using a broker. Most of the best penny stock brokers when it comes to trading.

They also require low amounts to open accounts with. However, some platforms will include additional fees when it comes to trading OTC penny stocks, for example. When it comes to buying NYSE or NASDAQ stocks, whether you’re looking to buy penny stocks on Robinhood, Webull, TD Ameritrade, ETrade, Schwab, Interactive Brokers, or other popular platforms, it’s good to understand the fee structure first. If you’re trading with a smaller account size, fees can quickly cut into your overall profit. Also, don’t forget that if you make money, you’ll have to account for taxes too.

Is Robinhood Good For Penny Stocks?

One of the more popular brokers right now is Robinhood. If you look at some of the fastest-growing brokers a few years ago, Robinhood was among the top brokers on that list. Since it’s as easy as downloading a mobile app and transferring funds, millions of new traders chose this platform as their first one to use. Compared to other day trading applications, the user interface is simple, with clear “buy” and “sell” buttons.

There aren’t many “complicated” charting tools to fit into a tiny cellphone screen, either. New traders can also get free stock through this gamified platform. These are features that’ve attracted so many new traders to Robinhood. But there are plenty of downfalls that might make it unattractive to traders.

Read More On Robinhood

Can You Use Robinhood To Buy Penny Stocks?

This is one of the points of contention on the app: Can you use Robinhood to buy penny stocks?

ANSWER: While you can invest in penny stocks on Robinhood, your choices are more limited compared to other platforms. Technically speaking, Robinhood has said that it doesn’t give access to penny stocks so for this section, we’ll reference them as “stocks under $5.”

For starters, the app only allows access to NYSE and NASDAQ stocks under $5. That means (with few exceptions) OTC penny stocks are untradable for anyone using Robinhood to buy penny stocks.

However, there are still thousands of stocks to buy on Robinhood. Another shortfall is that trade execution times are slower in many cases. Other apps and brokers have been set up for faster execution times, which mean better chances of buying penny stocks at the price you want. Furthermore, the company came under fire by the SEC for the way trades were executed by the platform.

“Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars. Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers,” said Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit in a statement from the Commission in 2020. Ultimately, this entire ordeal resulted in a requirement of Robinhood to pay a $65 million civil penalty.

How Do You Pick Penny Stocks To Buy?

If you’re learning about these cheap stocks, it’s important to also know how to choose penny stocks to buy.

ANSWER: A good rule of thumb is that these cheap, nano-, micro-, and small-cap penny stocks shouldn’t account for more than 5-10% of your overall portfolio.

Now, I’ll be the first person to say that things have changed.

[Learn More] Penny Stocks & Due Diligence: Understanding Important SEC Filings

Many more are finding day trading as a viable option. The old adage pertaining to risk and overall portfolio might not hold true for some. However, in order to take on more risk in your portfolio – ie day trading penny stocks – you definitely need to understand the psychology of trading.

Being able to forget losing trades quickly, not getting emotional, and learning how to cut losses before they turn into bag holdings is key. Here’s a simple example for you. Let’s say you trading with $1,000. You use 20% of that cash to place a trade. You buy a penny stock and it starts going up. Do you have proper profit targets laid out or is it just, “I’ll take profit when it feels right”?

Trading “when it feels right” is the first sign that emotion is part of your strategy. It shouldn’t be. So when you’re planning your trade, set initial profit targets so you can actually make money as you’re trading.

Learning How To Day Trade

Proper profit targets and even more importantly, proper stop loss targets are important. Some will use levels on a stock chart, while others will use a certain percentage stop loss. In either case, you want your losing trades to cost you the least amount of money while giving room to still take advantage of volatility especially if a stock dips slightly. Basically, you don’t want your stop loss to be so close to the entry price that there’s no room for a little swing in price. Don’t forget that losing is part of trading. But again, you want your losses to be small and your wins to be big.

Here’s a quick example of what I mean and how a trader with a bad win rate can still be profitable. If you make 10 trades and 7 are losers while 3 are winners, on the surface that might make you think that person is a bad trader. But if the 7 losers only resulted in losses of $50 apiece with the 3 winners resulting in gains of $200 apiece, the account value is actually net-positive. At the end of the day, it’s all about making money in penny stocks.

Simply put, the actual strategy of day trading isn’t very complex. When someone asks “How do I day trade penny stocks?” it’s as easy as saying: open an account, fund it, and trade. By now, though, I hope you understand that successfully day trading penny stocks involves more than just the basics. Education, Education, Education!

Choosing Penny Stocks To Buy

How do you choose penny stocks to buy? There’s a lot that can go into choosing the best stocks.

ANSWER: Some standard practices include things like technical analysis, fundamental analysis, and identifying momentum.

When it comes to technical analysis, you’re looking at different types of chart patterns and bullish or bearish set-ups. Day trading using technical analysis will see most traders analyzing charts using specific indicators. If you want to learn more about different chart patterns, check out Penny Stock Chart Patterns Every Trader Should Know [Top 5].

Now, when it comes to fundamental analysis, these are things like company headlines, corporate filings, industry events, and the like. Essentially, you’re looking to see if there’s an underlying ‘event’ that would have gotten the market excited (or depressed) about a certain stock. Fundamental catalysts can be the initial reason a stock begins moving. Then technical catalysts tend to follow.

[Learn More] Where Do Penny Stocks Fit Into Your Portfolio?

When it comes to choosing the best penny stocks to buy, you’ll want there to be, at the very least, a consistent pattern. You’ll also want to make sure that trading volume is strong. Buying penny stocks that have very low volume can present bigger problems when it comes time to sell. Usually, low-volume penny stocks are thinly traded which means there aren’t many market participants. In this case, you’ll likely have a difficult time getting the best price since not many are buying at the ask (low buying volume), and those who are bidding might not be bidding (offering to buy) at prices close to the price you’re willing to sell.

Are Penny Stocks High Risk?

This leads me to the next common question: Are Penny Stocks High Risk?

ANSWER: Penny stocks are very high risk.

However, it’s one of the few ways to actually make considerably higher amounts of money for lower sums of capital. Let’s say you’ve got $100 in your account. But with a real strategy and a keen understanding of the basics, you can make money with penny stocks starting with smaller sums.

If you were to buy $100 worth of any of the penny stocks under 10 cents, for instance, your risk/reward is very high. In this example, let’s say the stock is right at 10 cents. If that stock moves up by just 2 cents, you’ve just made a 20% return on your investment. That far outpaces the return that the market yields, per year, on average. If a stock like Apple were to move 2 cents, it’s unnoticeable to your bottom line. Now, the other side of this coin is if that 10 cent stock decreases by just 2 cents. Now you’re looking at a loss of a whopping 20%. In the grand scheme of things, that 20% is equal to $20 which may not seem like a lot of money.

But we’re not here to build bad habits. Equally speaking, if a $10,000 account lost 20% on a single trade or a $100,000 account lost 20% on a single trade, the monetary losses are obviously clear. So whether it’s $100, $1,000, $100,000, or $1 million, build good habits. These don’t involve losing 20% on any trade. Remember, keep losses small and gains bigger. A 20% gain is great, so is taking a 5-10% loss if it saves you from losing 20% or more.

Has Anyone Ever Gotten Rich Off Penny Stocks?

Are you wondering if anyone has “ever gotten rich off of penny stocks?”

ANSWER: the simple answer is yes.

With a proper strategy in place, there is always a way to “get rich” by trading penny stocks and blue chip stocks alike. As I’ve explained above, the goal is to make money. Doing so, consistently, should eventually bring your account value to a level that meets your own definition of “rich”.

It’s also important to have a strategy that keeps losing trades small and capitalizes on winning trades (starting to get the point?). Even if you are in a winning trade and decide to take a profit while the stock continues higher, you can always re-enter a trade if that stock’s trend is truly as strong as it appears to be.

Trading Strategies Explained

One of the strategies for day trading stocks is called tier trading. The basic fundamentals of tier trading involves buying and selling penny stocks in different chunks or “tiers”. When it comes time to buy into a stock that you think will move in the direction you want it to (either long or short), you can “test the waters” without risking all of the cash you want to invest into this stock.

In that case, if the trade doesn’t go the way you think, you’re only losing a certain percentage on a smaller amount of funds. Similarly, if a penny stock ends up breakout out big, you also secure a lower cost average while also taking advantage of the entire trade as it aligns with your original thesis.

Let me give a quick example. Let’s say you’ve got $1,000 you want to trade a penny stock with. You use 20-30% of that to take an initial “tier” into your trade. If the stock pulls back and fails the trend you thought it would actually confirm, you’re only taking a loss on $200-$300, not $1,000. If the trade actually does confirm your thesis, now you’ve secured your initial cost basis, as the stock moves in the right direction, you can use another 40-50% to take a larger position.

The further it goes in the direction you want, the more confirmation you’re getting that your trade is working out. You can then start selling off pieces of your original tier to secure early profits. You can then repeat entering and exiting along the way as the trade remains in the trend you aimed for. The video above helps to further explain this idea with a real life example.

How Can I Make $100 A Day Trading Stocks?

This is always a question you see with new traders and that’s a great question. On average, a year has about 252 actual trading days in it. That means if you can make $100 a day, your taking in a gross profit of over $25,000 without having to drive to a job every day.

Are you wondering “How can I make $100 a day trading stocks?”

ANSWER: The answer to this question is strategically.

But there are some things we need to discuss. First, how much money you need to make $100 a day trading stocks is a variable that depends on your skills as a trader.

It’s much easier to make $100 a day with a larger account consistently than it is with a smaller account. Here’s what I mean: because even that statement has its own variables. There are stocks that trade in channels. These channels might be larger or smaller depending on the overall volatility of a certain stock. In the case where this channel (or fluctuation in the price) is – say a 1-2% swing consistently – then you know or have a good idea that if you buy $10,000 of that stock, you can lose or make $100 a day or more relatively easy.

Risk vs Reward

You’re risking $10,000 to make $100 to $200. Some traders may be ok with that, while others see this as a very large outlay of capital. The smaller the account, the more volatility you’ll need to find in penny stocks in order to make that sum. On this note, to make $100 a day with a $1,000 account, you’ll need to buy penny stocks that return at least 10% or more, every day. If you’ve got a $100 account, then you’ll need to find penny stocks to buy that go up 100% every day. The larger your account grows, the less volatility you’ll need to make $100 a day trading stocks.

This also holds true if you want to ask, “how can I Make $1,000 a day trading stocks,” or “how can I make $50 a day trading stocks;” it’s all based on simple math and percentage gains. For those looking for high volatility, high-risk trades, the search might also focus on what the cheapest penny stock is. In this case, the cheapest penny stock trades at a price of $0.0001 per share, in the public market.

Penny Stocks: Ultimate Guide to Comprehensive Answers & FAQs

These are very risky and usually involve companies with hundreds of millions or billions of shares outstanding. Even though the price per share is “cheap,” the chances are low that the stock increases at all unless hundreds of millions or billions of shares are exchanged every day.

The Bottom Line When It Comes To Trading Penny Stocks

Whether you’re day trading or looking for the best penny stocks to invest in, there are ways to consistently profit. We’ve got a 60+ page eBook that goes into more detail for how to make money with penny stocks. You can download it for free – “The Beginner’s Handbook For Trading Penny Stocks“. The important part is to understand that penny stocks, like most investments, are risky. Cheap stocks like these have a higher risk profile than most other investment vehicles. However, if you can successfully navigate that risk and put together a solid strategy, then there’s no reason that penny stocks can’t be for you.

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By J. Samuel

As a trader and expert finance writer, I enjoy finding new and emerging trends that may have been overlooked by the average masses. If there's one thing that a trader or investor wants to know, it's how to use valuable data to their advantage. My expertise is in uncovering this data and compiling it into actionable information. As a professional finance writer, I've contributed to many of the top finance platforms and pride myself on researching factual, publicly available information and using that in all of my articles.

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