Learn how to trade in the penny stock market and arm yourself with these essential tips to increase your chances of success.
If the world of penny stocks sounds enticing to you, don’t worry you are not alone. The attraction to the promises of big returns with minimal investment has the power to blur anyone’s vision with dollar signs. Understanding how to trade penny stocks is crucial in these markets. The act of investing in penny stocks happens less-so as these shares are held for a shorter period of time (where investing usually consist of long-term holds). If you have determined that this trading sea of risk and speculation is right for you, here are some penny stock trading tips to actually stay afloat in these waters.
9 Things To Know When Trading Penny Stocks
Pick your own stocks
When conducting your research on penny stocks, you will certainly come across quite a few “big winners” that are all but ready to explode higher. Disregard these tips as buying these stocks blindly leaves you more vulnerable to scams and misleading information. This also means ignoring the success stories you will certainly hear about. You are better off taking the time to research and find stocks yourself.
Know your numbers
When you find the company you want to buy, don’t dive in right away. Track the company for some time to get a better feel for how the price of the stock moves. Have an entry price in mind that you believe would be fair to get in at. Once you’re in, have an exit price as well. Know when you will sell your shares should they move lower, limiting your loss, as well as when you will sell higher and take a profit. You can even configure these transactions to automatically occur for added insurance.
Don’t get greedy
You can lose that 20%-30% return just as quickly as you made it. Stocks in the penny stock market can change directions rather quickly and those that are slow to react are often left selling their position to cut their losses. Take your profits when you can and move on.
Don’t look back
It’s easy to sell a stock and then watch as it climbs higher and higher in the following weeks and months. The agony of watching this and thinking of what could have been will only cause you to over think and make mistakes going forward. Once you have parted ways with a stock, move on to the next one and disconnect emotionally from the previous one. Only check-in on the price of the stock for your own educational purposes but never second-guess yourself. When in doubt, always refer to number 3.
Second-guess what you hear
From company management, from online sources, and even from your stockbroker, don’t be afraid to second-guess. In the dreary world of penny stocks, it is not uncommon for involved parties to publish misleading information. Your job as a shareholder or a potential shareholder is to take everything you hear with a grain of salt and confirm as much information as you can.
Keep a long position
I.E. don’t sell short. Penny stocks are extremely volatile and if you end up on the wrong end of a short position your losses can be pretty significant. When you purchase a stock, your losses are limited to your investment. When you take a short position on a stock, your losses can technically be infinite as the stock can keep rising. The large swings in penny stocks make short positions all the riskier.
Follow the volume
Stick to stocks that have a high number of shares trading hands every day. Too little volume and you can have a difficult time finding a buyer to liquidate your position. This is an unfavorable position to be in when a stock is on the decline. The size of your position will also affect how easy it is to get out. Keep your position relatively small to the average volume that is trading every day.
Study the underlying company
Too often penny stock traders are making their picks based on technical signals and forget about the underlying company. Look for solid earnings patterns and companies making new highs that are paired with strong fundamentals. There are plenty of good companies listed as penny stocks that make great long-term investments. Companies like True Religion, Pier 1 Imports and Monster Beverage were all once penny stocks looking to find their way.
Don’t be an emotional investor
Never fall in love with a stock. This may blur your vision of the true potential of the stock leaving you susceptible to losses. Even if you are absolutely convinced that this stock is a winner and have recommended it to your friends and family, a good investor is able to separate the emotions from their investment.
THE 3 BEST TOOLS FOR BEGINNER INVESTORS
Updated December 25, 2022: At WallStreetSurvivor, our passion is helping you learn to invest in the stock market the RIGHT WAY! As part of our commitment to you, we are constantly evaluating all types of financial tools from stock picking newsletters to brokerage apps to stock screeners and more. Here are our favorites:
1. BEST SOURCE OF STOCK PICKS FOR THE LAST 5 YEARS
We have been tracking ALL of the Motley Fool stock picks since January 2016. That's over 5 years and 120 stock picks. Take a look at their stock picks' performance for the last 5 years:
- Average return of their 120 picks from 2016 to 2020 is 233%
- That beats the SP500's 88%
- 84% of their picks are up
- 57 of those 120 stocks have doubled
Now, no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super profitable as you can see. They do pick some losers, but the key for investors is to invest equal dollar amounts in all of their picks. So if you have $1,000 to invest in the market each month, buy $500 of each of their 2 monthly stock picks.
Normally the Motley Fool service is $199 per year but they are currently offering it at their lowest price ever: Just $79 for 12 months..
CLICK HERE to get the next Motley Fool Stock Pick
2. BEST STOCK BROKERAGE ACCOUNT
Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering one free share of stock (value up to $200) when you open a new account. In addition, they will give you another free share of stock (up to $250) for each friend that you refer, max 3 friends a year.
Here's the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $200. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $200.
3. FIVE STOCKS LIKELY TO DOUBLE
ZACKS Investment Research just released their list of 5 Stocks Likely to Double. ZACKS has been around since 1978 and their top rated stocks have an average gain of 25.35% per year over the last 30+ years. Best of all, you can get this list of 5 stocks for FREE by CLICKING HERE.
PRICE DROP: Get 12 months of Motley Fool stock picks and save $110. New Subscribers can try the service now for just $89.