How to Trade and Invest in Penny Stocks: 9 Pro Tips

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

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.