Penny Stocks

Penny Stocks: A Beginner’s Guide

penny stocks

When it comes to trading penny stocks, the markets are very active and move very fast, so you have to stay on top of it! Penny stocks, unlike a lot of mid and large cap stocks, come with their own unique risks and rewards that can happen overnight. A micro cap stock can explode in a matter of minutes, but might also do the opposite if you’re not careful.

Truth be told, these are probably one of the most rewarding kinds of stocks to trade, especially for day traders. Penny stocks appeal to day traders because of their fast movement. It can be an addiction for some and for many others a full time income.

Getting Started in Penny Stocks…

Penny stocks are stocks that trade anywhere below 5 dollars per share. Some define penny stocks as a stock that trades below one dollar, but these stocks have been known to fluctuate around that point based on market momentum, so it’s best to define the term a little bit more openly in order to include a lot of low priced stocks that behave in a similar manner.

Penny stocks are often the source of much controversy due to their low share prices and are often given extra fees by brokers since they need to be traded in hundreds or even thousands of shares at a time to make any worthwhile profit at all. It’s good to know your broker’s rules with penny stocks so you can avoid getting slammed with large penalties.

Why Trade Penny Stocks?

There are a lot of reasons to trade penny stocks. Which ones make the most sense to you?

Penny stocks are fast moving stocks. If you prefer to do day trading over short intervals, micro cap stocks could be just up your alley. For day traders and swing traders, you can expect to see fast profits coming in from these trades.

The reason penny stocks move faster is because of low volume. Volume being low, a quick burst of hype and mania can move into the market quickly since the market is so small. Small markets move much more quickly than large ones, meaning penny stocks are subject to these sorts of sudden upswings and downswings when the market winds shift.

Penny stocks are cheap. If you are looking to get started trading but don’t have a whole lot of startup capital, somewhere below $50,000, penny stocks could be a good starting point for you. After all, stocks like these not only rise quickly, but can be played in small shares for little upfront capital.

Think of it this way. A single share of Google can cost you around $500 in today’s market, given current conditions. Comparing this to penny stocks, a single share of a penny stock might only cost you a few cents. This means you can play a small position of a few hundred dollars if you’re looking to split up a small portfolio into individual trades.

Penny stocks have the highest growth potential. You may be surprised to know this, but micro cap stocks actually outperform the rest of the market most of the time. The reason is simply because for a penny stock, there is more room to grow than there is to fall. When a stock is so low, it is usually a bit more likely for it to go up than down.

Let’s put it into perspective with regular stocks. If you are trading Google at its current market price, what are the odds it will double in value? Practically nothing.

Now put the same test into the penny stocks market. The odds of doubling in value are still pretty low, but they are much better than the odds of this happening within an already established company. Since Google has already grown into a multi-billion dollar giant, they are starting to hit the steep edge of their growth curve. Penny stocks, on the other hand, are just now beginning to uncover their growth possibilities since they are typically new or undervalued companies.

Risks of Penny Stocks

We all know that with every particular venue of trading and investing, there are both potential gains and potential losses. This is the nature of investing, and every new trader should come to embrace this and learn to be a bit comfortable with a certain level of risk. Instead of fearing it, get to know it and learn to navigate it.

That said, you should be worried about a few things when it comes to penny stocks! These are very unique stocks after all. And while some people make great money trading them, others have lost and regretted their decisions. Here are some pitfalls to look out for.

Penny Stocks are quite volatile. In layman’s terms, this might sound like a horrible thing, but suffice it to say, volatile simply means the tendency to change direction. Penny stocks have been known to change direction a good bit of the time. This can cause some problems. You don’t want to be on the wrong end of this.

You may need to trade with a looser stop loss and watch your stocks very closely. If your stop loss is tight, your penny stocks will often trigger and kick you out of the trade. This makes for some problems. Instead, you just need to trade with a more open stop loss and keep a close eye on your trades. It’s not for those who prefer passive trading or automated trading, so be aware of these movement factors.

Penny stocks are a bit more susceptible to corruption. You may have heard of these scams. Penny stock scams happen all the time, and the real victims are those who just aren’t aware enough to do their own research and figure out that it isn’t real data being presented.

Typically a penny stock scam is what is often referred to as a pump and dump. This is where a hedge fund or investor hires third party penny stock promoters to bump the price of a stock by giving out bad research on it. The end result is the people on the other end buy the stock while the person paying to have it promoted sells it or shorts it at a profit, leaving the gullible investors to clean up the mess.

Make sure you do your own research. Sometimes these stocks are still worthwhile in terms of profits, but if someone comes up to you who is clearly compensated and offers information about a stock you can’t verify anywhere else but from this person, clearly you need to look elsewhere for your next trade.

Penny stocks are often heavily promoted. Stock promotion in and of itself has its own complications. I am not saying that it is bad to buy a promoted stock simply because it is being promoted, but the truth is, if a stock is promoted, it will likely undergo some sudden changes in the near future. In other words, if you get a newsletter blast that a stock is hot, expect that stock to go up sharply.

The reason is because the newsletters themselves cause momentum in the market. When a company pays to have their penny stock promoted by a third party, they are trying to attract investors and traders to their stock. It causes a sudden increase in volatility and consequently, a lot of problems if people aren’t careful as the stock can come down quickly when profit takers exit out at the same time as a result of inflated hype.

Just be mindful that penny stocks which are promoted behave in a sharp, volatile manner, and while you can make some good change, just be sure to know the risks!

Essentials of Trading Penny Stocks

Okay, so you still want to trade penny stocks? It’s an exciting place to be in the market! But there are some things you need to know about first. Let’s review a few things before jumping into the lion’s den, shall we?

Getting a Good Broker

The broker you pick when you first start out trading penny stocks will have a huge impact on your profits. It may not seem like a lot to pay a few extra dollars in commission, but add that up over hundreds of trades throughout an extended period of time, and you are looking at a lot of potential trouble.

Instead, when trading penny stocks, take a look at some of the preferred brokers out there for these kinds of stocks. You want to make sure you are working with a broker that has the following:

1. Good reputation. Don’t bother if the site is obscure or has no established clientele. Look for good reviews on forums and blogs.

2. No extra commissions on penny stocks or high commissions. A lot of brokers charge extra to trade penny stocks. Don’t go with one of these.

3. Good educational resources. It will take you some time to get down the basics of timing your trades properly. Make sure you have some good material to dig through provided by your broker to keep you from losing yourself!

Overall, my number one recommended broker for trading penny stocks has got to be Zecco. They offer low commissions and have no fees for penny stock trading. Definitely check them out if you are in the market for a great service like this.

Getting a Good Penny Stocks Education

Penny stocks require some patience to trade well. You may have to spend the first month or two reading through material and getting yourself in a good position mentally before making your first live trade. To get yourself started, make simulated trades for a few months until you feel comfortable risking real money.

Here are some great resources to use to learn more:

Investopedia: Totally free, this site has just about everything you need to get started. There are thousands of articles and tons of content here to learn not only penny stocks but hundreds of other trading styles as well. A must have if you’re going to learn to trade penny stocks.

TheHotPennyStocks.com: Another good one, this site is amazing for trading penny stocks. It not only has great tracking and information, it also offers a place for people to interact and learn from each other. A great place to grow and develop as a penny stock trader.

Investools: Investools has some awesome courses that are top notch for beginners. If you have been trading penny stocks for a while now, you might want to skip through and move on to more advanced stuff or just start trading, but for beginners it’s a great thing to get started in.

Getting a Solid Newsletter for Penny Stocks

Some newsletters offer great trading advice and stock picks, others not so much. Truth is, a lot of people get caught up not knowing the reputation of the people providing them with the picks they get. So, in a rush to get somewhere financially, they make trading decisions that aren’t prudent and don’t add up to profits.

Penny stocks are complex, so if you’re going to use a newsletter, use one that is reputable and worthwhile. It might cost you in the long run if you go with a free newsletter or one with very little reputation.

My advice is subscribe, to 4 or 5 of these, try them out in paper trades, then see what you can make in live trades. If your results are good on simulated trading, then chances are, the same results can happen for you in live trades if you behave prudently. Just remember, most paid penny stocks newsletters are a bit better than the free ones! This doesn’t mean free ones don’t work, just that they are a bit less reliable.

And also keep in mind that when trading penny stocks on a newsletter, you are trading a promoted stock. Whether it is being promoted literally or just as a natural result of it being on the newsletter itself, it is creating extra market hype as a result of other people seeing the newsletter, so be aware!

My Top Recommended Newsletters for Penny Stocks

Best Penny Alerts

The Best Penny Alerts trading system was introduced by a young Ivy League graduate named David Roy who sought out greater and greater challenges in trading and entrepreneurship than traditional jobs and schooling could offer him. He wanted to use his knowledge of mathematics and finance to make himself a fortune in the stock market.

His first few attempts to develop a system around stocks yielded him incredible results! He was making 5 to 10 percent per trade on mid and large cap stocks on simulated trading accounts. It was then that he realized he could take his profits into an even more lucrative market and make even more money.

The penny stocks market!

David has since then made a solid fortune trading penny stocks and has invited thousands of members to trade alongside him. He has made some great calls over the years including LYJN which jumped over 1200% and ECOB which went up 63 percent in a single day after being picked!

Pound for pound this is one system you should consider getting started with if you need a reliable resource and more penny stocks to watch in your inbox. I highly recommend it for people who need the extra picks and are ready to trade for real!

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