Your Penny Stocks Challenge Begins with A Solid Education
Penny stocks elicit mixed reactions from the public, most of whom have no knowledge of what penny stocks really are. Some folks are enamored by these financial instruments, particularly when they pick winners. Others are swayed by the crooked behaviours of people like Jordan Belfort, the self-styled Wolf of Wall Street. Today, we are going to debunk the myths of penny stocks and present you with the facts.
Guide to Penny Stocks Trading
- What are penny stocks?
- How do you select penny stocks?
- Where do you trade penny stocks?
- What profits can you expect from penny stocks?
- Is penny stocks trading right for you?
What are Penny Stocks?
According to the SEC (Securities and Exchange Commission), penny stocks are defined as follows: ‘… Any stocks that are selling below $5 a share. In the past, penny stocks are often considered only those stocks selling below a dollar, but current SEC regulations indicate that penny stocks are defined as any common stock selling below the $5 threshold.’
Penny stocks are available over-the-counter (OTC), or as Pink Sheets. When companies file their financial statements, with the Securities and Exchange Commission, the suffix OB will be listed alongside the company’s stock on the Bulletin Board. When you select penny stocks as Pink Sheets, the same SEC rules and regulations do not apply. This means the companies do not have to report important information. These are a dodgy proposition.
Penny stocks are inherently volatile, due to lack of liquidity. When companies have low levels of interest, individual buyers have outsized influence on the price of the stock. An owner, or stakeholder can run up the price by purchasing a lot of stock with a little money. This will manipulate the price of the stock. By the same token sales of penny stocks can also drop the price spectacularly. Unlike traditional stocks which have large volumes of trades, greater liquidity, and less volatility, individual traders are less likely to impact pricing of those stocks.
Penny stocks are ‘graded’ in tiers. As a trader, you can consider these to be your guide to picking reputable penny stocks, and avoiding poor performers. If you want to know how to trade penny stocks, it’s important to know about the 4 tiers of penny stocks:
- Tier 1 Penny Stocks – These are listed on major exchanges like the NASDAQ or the NYSE, priced below $5, or a little more than that. They are speculative, but less likely to be manipulated, owing to SEC reporting requirements.
- Tier 2 Penny Stocks – these penny stocks are priced between $0.01 and $0.99. That’s the traditional definition of penny stocks.
- Tier 3 Penny Stocks – these penny stocks are priced at less than a penny. They are not listed on the NASDAQ, or the NYSE, and they are best avoided.
- Tier 4 Penny Stocks – otherwise known as 000 stocks. They are subject to extreme manipulation, and most of the people who benefit from owning these are the people who bought them at inception.
How Do You Select Penny Stocks?
Careful selection of penny stocks is sacrosanct. With scores of stocks readily available to traders on a daily basis, it can get overwhelming picking one stock from another. Fortunately, there are tips, tools, and strategies to implement to better assist you in selecting the right penny stocks. The reputable stocks trading platforms offer stock screeners which indicate precisely which stocks have moved the most, or are subject to extreme volatility. For a penny stock trade to work, volatility and liquidity are prerequisites. The stock price has to move up or down in order for traders to profit.
Since so many penny stocks companies never make it into the mainstream media, there is very little to influence their pricing. Many companies with low capitalization struggle to gain exposure with institutional investors, and retail investors. It is heartening to know therefore that companies such as Amazon, Xerox, Monster Beverage Corporation, Fannie Mae/Freddie Mac, Ford Motor Corporation, Pier 1 imports, and Facebook all began as penny stocks.
Picking winners is a by-product of careful and methodical analysis, extensive learning, in-depth understanding of the financial markets, and an ability to stay the course. There is no shortcut to picking the right penny stocks. Nobody has a crystal ball to anticipate which stocks will rise and which stocks will fall. However, the right penny stocks education can certainly make the process much clearer.
Your education will invariably take you along the righteous path of technical and fundamental analysis. The use of charts is absolutely essential when picking stocks. Trendlines, patterns, economic indicators, news reports, and other pertinent data must be used to make informed trading decisions.
Where Do You Trade Penny Stocks?
Penny stocks are traded on trading platforms, at your preferred brokerage. There are many different trading platforms and brokers you can use, including E*TRADE, Interactive Brokers, StocksToTrade, Fidelity, Charles Schwab, and RobinHood. Each trading platform has its merits, and it’s best to conduct a little research into the pros and cons of these trading platforms to ensure that you get the most out of them.
Recall that penny stocks are also traded Over-The-Counter or as Pink Sheets. Always use a reliable brokerage that executes trades in a timely fashion, and allows you to trade with minimal fees, commissions, and charges, with the funds that you have available. If you want to trade low-cost penny stocks, certain brokers are not going to fit the bill, so do the necessary homework.
What Profits Can You Expect from Penny Stocks?
We can answer this question with another question: How long is a piece of string? In fact, there are no limits to what you can expect to generate from penny stocks, but you should definitely set take profit limits. Whatever your profit percentage objective is, stick to it and build profits incrementally with penny stocks trading.
Remember, the purpose of day trading is to build up a solid set of returns on multiple stocks over the long-term. It’s not a one hit wonder scenario; it’s a trading strategy that encompasses discipline, patience, and consistency. Certain traders have made millions of dollars trading penny stocks, others have made hundreds of dollars. If you’re not careful, you can lose too.
Is Penny Stocks Trading Right for You?
It may be. Recall that penny stocks are high risk financial instruments. Most of them have no proven history of performance. There is very little for you to go on when you choose penny stocks in a haphazard fashion.
Thorough analysis can better assist you in picking high-performing penny stocks. If you have an appetite for risk and you are prepared to stake a certain percentage of your bankroll in these alternative investments, go for it. If you are risk averse and scared to lose money on volatile options, then avoid penny stocks.