What Are Penny Stocks?
A penny stock is a specific type of share that is priced very low. They have a lot of specific benefits, but they aren’t for everybody. They can bring about huge returns, but it is equally possible that they will make you lose your entire investment.
According to the SEC, a penny stock is a stock traded below $5. When they were first developed, they traded at less than $1, which usually represented small startup companies that were trying to get a foot in the door. Penny stocks were, and continue to be, speculative investments. The most popular industries in which people invest in these types of stocks are in the fintech, Internet, and biotech sectors. What makes them so special, and so risky, is that they can easily lose 50% of their value overnight, but they can equally easily gain 100% overnight. So if you do want to work with penny stocks, you have to be ready and willing to lose it all.
For most people, the risks are outweighed by the fact that they can also earn big rewards. Unfortunately, earning a substantial profit is quite rare, which is why it is vital to understand how these stocks work. Most importantly, you have to know when to walk away. Of course, if you know which stocks are right and which prices are right, you can make a really nice profit.
Editor’s Resource: Best Penny Stock Newsletters
What you need to be able to do is identify a serious company, and one with a business model that works. Essentially, you need a stock that is worth very little because the company is new and not an existing company that has made bad management decisions.
How to Trade Penny Stocks
- Do your homework so that you know which risks are involved with your penny stock.
- Open a brokerage account. Online accounts are readily available.
- Investigate the trade status of the penny stocks you are interested in, so that you know how big is the risk for each particular company.
- Be wary of fraudsters. If something sounds almost too good to be true, it probably is.
- Pick a strategy that works for you.
- Try to invest in high volume stocks at the beginning, particularly the ones that are marked for an earnings breakout.
- Make the transaction through your brokerage account.
Ways to Find Penny Stocks
There are a lot of ways in which you can find good penny stocks. These methods include:
- Signing up to websites that provide free data on all the stocks on market in real time, that allow you to sort through the different options as well. Make sure these are reputable websites, such as MSN’s Stock Screener, for instance.
- Spending a lot of time researching the companies you are interested in. Look at who they are, what their business model is, what existing financial data they offer, and so on. Do not pick a penny stock just because you overhead people on the bus saying that they were considering it.
- Learning from expert penny stock traders, such as Timothy Sykes, who provide information on the trades they are making and why, as well as list historical information on various penny stocks. Additionally, they usually have training courses available to help you become an expert in penny stock trading.
- Signing up to paid penny stock services. Be careful with these, however, as you do need to avoid scams. It is vital to make sure that the company is reputable, such as Penny PRO, which even allows you to get started for free.
- Being skeptical about any information you come across until you have determined that it is not. If you search for penny stock recommendations, you will find thousands of them, and only a handful will be correct. Stick to people like Timothy Sykes or other experts if you want trustworthy recommendations.
- Going to the stock exchange, such as NYSE and Nasdaq. It is unlikely that the penny stocks will be listed there because the stocks are simply too small to meet the requirements for getting listed. However, they should be found in the pink sheets and on the over-the-counter bulletin boards.
- Verifying any claims that are made. Because the biotech industry is such a popular penny stock area, you will often see claims that a new drug will soon receive FDA approval, and this is why that particular stock will make a good investment. You can check this, and other such claims, by searching for a legitimate source to back up the claims.
- Being skeptical about anything that you see. If people promise you a get rich quick scheme, avoid them immediately. There is no way to get rich quickly, unless you win the lottery and the chance of that is almost nil. Instead, you must understand that you will have to do your research, work, and be prepared to lose money if you are to be successful in the long run.
Penny stock trading is highly speculative and volatile, and therefore not for everybody. Because the stock prices are so low, however, a lot of people think they are a fantastic way to at least get started on the investment market. This is certainly true, but you must be prepared to lose whatever money you put into your penny stock investments, probably several times. If you have what is referred to as “risk money”, i.e. money that you can afford to lose, then penny stocks may be the way forward for you. However, always start small and only scale up once you feel comfortable in what you are doing.
There is a lot of information out there for beginners, including from trusted sources like Timothy Sykes, and you need to use this to your advantage. If you do, then perhaps you will be able to hit the big time in the same way that he did. And if you don’t, but you did follow all the tips described above, then you can at least say you have learned a lot about trading, and you should be able to apply the knowledge you have gained to other forms of trading.