Beginners’ Guide to Trading Penny Stocks

Penny stocks are notorious as a way to get rich quick and make millions on high flying prospects.

Many of these perceptions came from the portrayal of Jordan Belfort in the movie “The Wolf of Wall St”, where he scammed investors out of $200 million by manipulating penny stocks.

If you are looking to get into trading penny stocks, keep reading this guide to learn more about the penny stock market and how you can take advantage of it.

The History of Penny Stocks

Penny stocks have been a thing since the beginning of the stock market. They are not actually all worth just pennies. They are defined by the SEC as being a small company that trades under $5 a share.

These stocks can be traded on exchanges such as Nasdaq, NYSE, foreign markets, or even over-the-counter.

Penny stocks are famous for being risky investments and can be challenging to grasp the concepts of what makes the stocks move.

Risk Options

Penny stocks are incredibly volatile or can change prices in the matter of a second – making them difficult to trade and actually make money with.

The fact that the prices are so low attracts people from all over the world who are looking to get rich in a short amount of time.

There have been people who have successfully traded penny stocks and managed to make a decent living.

However, there are have been many more that have lost a great deal of money.

Trading penny stocks take a tremendous amount of research, patience, and a bit of luck.

Since penny stocks are relatively cheap, they become victims to the pump and dump scheme that leaves investors holding bags. This was how Jordan Belfort made his living and became the living legend “Wolf of Wall St.”

Jordan’s company would buy shares of a penny stock, and then his salesman would push the stock on investors, telling them about how great it was.

After the investors bought in an pushed the price up, his company would sell out of their shares and take profits – leaving the other investors paying the price when the stock crashes.

Due Diligence

With any sort of investment, it is essential to do your due diligence and truly understand what you are investing in.

Due diligence, when it comes to stocks, means to research every aspect of the company, including:

• Management
• Earnings
• Valuations
• Cash flow
• Operating expenses
• Operating margins
• Balance sheet
• Strengths
• Weaknesses
• Opportunities
• Threats
• Competition
• The landscape of the industry
• New products/ services
• Trends
• History of the company
• History of the stock price
• Options

As you can see, due diligence takes a fair amount of effort to find these items and is one of the most critical steps in the investing process.

With penny stocks, due diligence is also extremely important because many times, valuations can be absurd, and for no good reason – these should be avoided.

The best thing to look for in penny stocks is growth.

You want to look for companies that are growing rapidly in terms of sales and revenue.

Operating margins are a good thing to take a look at as well – it could be a sign that the company is becoming more efficient in their processes.

Many traders in the penny stock market also trade based on technical factors. They take into consideration the past performance of the stock and predict where it will head in a specific time frame based on price and volume trends.

 

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So How to Trade Penny Stocks?

Penny stocks are an attractive investment due to their low prices and potential growth. But that doesn’t mean you should rush in and trade without knowing what you are getting yourself into.

Making money isn’t the hard part when it comes to trading penny stocks, keeping it is.

That means penny stocks fluctuate constantly.

You are bound to be in the green at some point if you haven’t bought the top.

However, staying in the green is the hard part and what gives most investors the most challenging time.

This is where strategy comes into play.

After doing your due diligence and deciding that a company is the right one to invest in, it’s important to take a look at the technical levels.

The technicals will give you a better idea of where the stock price has been in the past and where investors are buying and selling.

On a technical level, where investors are willing to buy is referred to as “support,” and where they are selling is called “resistance.” This is where the infamous “buy low, sell high” comes from.

When buying penny stocks, you should have a plan ready before you execute the trade. The plan should involve

• An entry price
• An exit price
• And a stop loss

Having these installed before initiating the trade will keep you disciplined – which separates the experienced traders from the amateurs.

Careless trading in penny stocks can cost you everything and should not be done under any circumstances.

Here are Some Investment Tips

Although many penny stocks are companies that are losing money and won’t make it, some are predictable in their trends and can be utilized accordingly.

Beware of chasing penny stocks that are already up by a large percentage, this could be a signal of a pump and dump scheme.

Staying organized is crucial when it comes to buying penny stocks. An email client can make a significant difference in terms of organization and staying on top of your due diligence. Learn more by clicking the link here.

Remember, when it comes to penny stock trading, the risk is imminent, it is up to you to manage the risk and make some money.

Interested in Learning More About Trading Penny Stocks?

Nowadays, many people are looking for extra ways to make money.

With the stock market recently hitting all-time highs despite the growing concerns about the economy, trading penny stocks is an attractive investment.

Penny stocks are cheap, allowing you to purchase more shares.

However, they don’t come without risks.

For more information on penny stocks and other investment news, check out the rest of our website!