Penny stocks have got a bad rap for a lot of different reasons, some unjustified. These stocks are poorly regarded by many retail and institutional traders, owing to their OTC and Pink Sheet status. Unlike traditional stocks listed on the NYSE, S&P 500, NASDAQ, and Dow Jones, many penny stocks simply trade over the counter. The literature is peppered with horror stories about company pump and dump schemes with penny stocks.
True to form, other than Tier 1 and Tier 2 penny stocks, many of these financial instruments are not subject to stringent reporting requirements by the SEC (Securities and Exchange Commission). This means that data is not fact-checked, to the detriment of traders. With limited transparency, and credibility, traders are largely flying blind with many of the stocks. In fact, one would not be remiss to say that companies without any infrastructure could simply list and sell penny stocks online.
Then, there are movies like the Wolf of Wall Street, with Jordan Belfort and his shenanigans pumping worthless penny stocks to hapless investors. Many similar examples abound. All of this negativity is enough to make one ponder the viability of penny stocks trading. Alas, all is not lost. There are always going to be bad apples in the bunch, but there are plenty of golden delicious options ripe for the picking with penny stocks too!
Today, you are going to learn what is needed to successfully trade penny stocks online. It’s not pie-in-the-sky fantasy; its reality. The perfect penny stocks trading strategy begins with a sound education. You have to conduct due diligence to understand the technical and fundamental elements of penny stocks trading. What makes a stock rise? What makes a stock drop? Why trade penny stocks? Where should you trade penny stocks? These and other questions need to be answered accurately before you put hard earned money into speculative assets.
What is a Penny Stock?
Penny stocks trade under $5 each. There is no requirement that a penny stock must meet a minimum threshold since anything greater than 0 is good. The maximum price in the US is $5. Outside of the US, in countries like the UK, a penny stock has a price ceiling of £1. Penny stocks typically trade for pennies, and in certain cases (Tier 3 and Tier 4 stocks), they trade at under 1 penny per share. Generally, it is best to trade Tier 1 and Tier 2 penny stocks since these are subject to certain reporting requirements of the SEC, making them more accountable and less likely to fly under the radar.
Tier 1 penny stocks are listed on the exchanges and subject to SEC rules. Tier 2 penny stocks are priced between $0.01 and $1. In your day trading activity, you likely won’t differentiate between different tiers of penny stocks. When stocks trade below 1p, or at thousandths of a dollar – trip zero stocks – they are subject to price manipulation, and are relatively risky propositions. These stocks require volatility and liquidity to trade well. Regardless, conduct due diligence with all penny stocks that you’re researching.
How To Pick Penny Stocks to Trade?
There are thousands of potential options when it comes to trading penny stocks. A stocks screener is a useful way to sift poorly performing stocks from potentially viable stocks. Gone are the days where you could look at a newspaper and circle top stocks with a pencil and call your broker to make the trade. Today, everything is happening at lightning pace, in real time. It’s no longer institutional traders on the floor of the stock markets who get to see the prices in real time – everyone can.
A stock screener is a useful resource you can use to narrow down your selection of top stocks. You can filter according to categories such as largest trading volume, or strongest gainers on the day, or biggest price movements et cetera. Picking the right stock screener is part preference, part technical prowess. A powerful stock screener should automate the process. As an example, Stocks to Trade (STT) features Oracle as an effective tool to automatically select top performing stocks.
There is no substitute for hard work though. Given how little is known about so many penny stocks companies, you will have to do some digging to unearth the gems. Beyond the company prospectus, the Internet may yield other tidbits of information including press releases, company announcements, exciting new developments, or mergers, management buyouts, and related information vis-a-vis your choice of penny stocks to trade. Act decisively when picking stocks, because prices rise and fall at the blink of an eye. Strike when the iron is hot!
Important Things to Know About Penny Stocks Trading
You can profit off penny stocks to the upside, or to the downside. It’s true! If you buy long, you are bullish about the penny stock. If you sell short, you are bearish about the penny stock. You can make money either way, provided you call it correctly. In penny stocks parlance, when you buy to cover, you’re buying back shares of a stock you sold short, for profit. When you short sell stock, you’re borrowing stock that you don’t currently own, with the intent of profiting from that stock when it dips in price. Remember these terms when you trade penny stocks, because you will likely be implementing these actions from time to time.
One of the biggest mistakes that people make when trading penny stocks is poor timing. In trading, as in life, timing is everything. If you miss the spike, you will have to wait until the next one. Likewise, if you fail to implement stop loss orders as the price is dropping, it’s possible for your trade to crater out. Many different protections are in place to guard against penny stocks trades that are moving against you. The only way to protect yourself is by implementing a trading plan. Have clearly defined entry points and exit points – that way you will not be at the market’s mercy.
Where Should You Trade Penny Stocks?
Penny stocks are traded at reputable brokerages and trading platforms. There are plenty of options available, depending on your risk preference, trading activity, and choice of penny stocks. Believe it or not, seemingly trustworthy penny stocks platforms aren’t necessarily ideal for day traders. For one thing, you may be limited in terms of the minimum trading account balance, or the maximum number of trades you can implement at any given time. A successful day trader must be able to manage multiple trades simultaneously. Fortunately, there are scores of trading platforms worth considering, including Stocks to Trade, TD AmeriTrade, Fidelity, Charles Schwab, Interactive Brokers, and E*TRADE among others.
Your goal with penny stocks trading is to understand the trading platform, the financial markets, and the factors that will likely cause prices to move up or down. To this end, try paper trading penny stocks before you trade for real. You’re never supposed to get emotionally invested in your trades – that’s not the purpose of trading penny stocks. The more knowledge you gain, the better your trades. Again, it doesn’t matter if prices are falling – that’s also good for penny stocks traders.