I thought I’d sum up the basics of penny stocks in one simple post that anyone can read and immediately gain a good foundation of what they are and some of the better ways to find profitable penny stocks to buy. The fact that you are reading a penny stocks for dummies article makes you not a dummy. Information is how anyone succeeds, and penny stocks are no different. It’s a smart thing to have a good understanding of penny stock investing and performing adequate research before even thinking about buying penny stocks. Bear in mind that each of following categories can certainly (and should) be looked into with much greater detail but this should get you started.
What Are Penny Stocks?
A penny stock has many definitions. For those who only trade on the large stock exchanges a penny stock is any stock that is less than $5 per share. The other definitions are generally based on market value. The market value is the number of shares multiplied by the price per share. Penny stocks are usually stocks with a market value less than $200 million (this number can vary.) The most obvious definition is any stock with a price less than $1 per share. The last definition you may see is any stock that is traded OTC (over the counter) or on the pink sheets.
Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information about them because the company isn’t required to have independently audited records and is never covered by a stock market analyst because virtually no one would read about it or pay for the information.
Penny Stock Risks
Without a doubt, the penny stock carries more risk than the average stock. The primary reason for this is the low value of the company makes the price easy to manipulate by wealthy individuals or small groups of people. A 100 billion dollar company can’t easily be manipulated by any individual person. A $50 million dollar company however can have 20% of the whole company traded by thousands of different individuals or small trading groups. Surges in buying and selling activity can manipulate the value of the company on the short term causing inexperienced traders and investors to change their buying and selling activities. This type of activity can be shady at best. Worse still, other people move beyond shady and into scams.
There are two primary penny stock scams that focus on the inexperienced traders and investors. For traders the biggest risk is the pump and dump. Here an advertising campaign will get a certain penny stock very hot by getting people who aren’t even into penny stocks, buying them. Then this will trigger your trading signals which under natural conditions would make a great trade. The scammers then dump all of their stock quickly into the buying spree. Once the marketing campaign is over and the scammers made their money, they are out and the price collapses.
Penny Stock Trading and Investing
In general when penny stock trading you’ll often do better with short term trading rather than holding stocks for years. This is because the longer your trade is the more risk you apply to your trade with scammers coming in or companies having negative information released. When penny stock investing you’ll also do best if your good at getting information no one else has. This is usually done by talking with people who work at these small companies to see how viable the company truly is. Those who are willing to go deeper than the information available on the internet can really win huge with penny stock investing.
Traditional technical analysis (i.e analyzing stock charts) and fundamental analysis (analyzing the financials) can also both help narrow down a profitable penny stock from a dud so don’t underestimate these traditional yet very effective stock screening methods.
Hopefully this provides a good “penny stocks for beginners” overview but don’t stop there; educate yourself further by reading my other posts and consider subscribing to a reputable penny stock newsletter. The more informed you are with proven penny stock strategies and solid investing advice, the better your outcome.
Follow a System that Works
Now if you’re really serious about making money trading penny stocks I highly suggest you subscribe to a reputable newsletter that provides real-time trading alerts and has a proven track record. Trading penny stocks is a high risk, high reward venture so it is absolutely vital to have a seasoned professional guide you.
One such newsletter I can recommend is called Microcap Millionaires run by Matt Morris and the main reason I like his service (aside from the nice gains) is his straight honesty – Unlike other newsletter and alert services out there that are often nothing more than paid penny stock pumpers, Matt is an actual trader who cuts through the bull and gives you his straight unbiased recommended trades.
But before I go any further I must say that though Matt’s real-time alerts can be extremely profitable, if you’re the type of person who has a hard time following instructions and instead lets your emotions drive your trades then please do NOT bother subscribing as you’d only be wasting your time and money. The reason I say this is because for you to really succeed with Matt’s service (or any trading methodology for that matter), you need to be highly disciplined in your trades. For example if you buy a recommended stock and it jumps up to the target price, sell your stock and lock in your profits. Don’t get greedy and hold the stock longer than suggested or you could very easily get burned. Also do not invest too much of your capital in any one stock – yes the majority of his trades are profitable, often very profitable, but you still need to spread the risk evenly so as to protect yourself from the odd potential loss.
Now just to forewarn you, when visiting his site the first thing you’ll probably notice is, well, the intro video is a bit cheesy (sorry Matt 🙂 ). Okay so he may not be the best video producer but he’s damn good at picking penny stocks! And if you can simply follow his stock alerts with discipline, you’ll likely be shocked by the type of consistent profits you can yield. Click here to learn more about Matt’s Microcap Millionaires newsletter.
Finding good penny stocks is not easy to say the least. In fact there is no sure fire way to pick the right stocks at the right time all the time. If there were, we’d all be rich! 🙂 The truth is choosing the top penny stocks to buy is more of a best guess rather than a solid formula.
Having said that however, don’t let this deter you as there are a number of indicators you can factor in when looking for hot penny stocks which can significantly increase your rate of picking profitable penny stocks versus losing ones. You should never just use one indicator when picking stocks however. All indicators should be looked at together as a whole to more accurately analyze a penny stock’s potential. The following are some indicators to consider when penny stock investing:
Strong Price Movement – If a stock has large percentage price gains with heavy transactional volume over the course of a number of days, this could be an indicator that the stock is starting to trend up and build momentum.
ROE (Return On Equity) – ROE, often considered the most important ratio in stock analysis is essentially the quantity of net income returned as a percentage of shareholders equity (SE). It’s calculated by dividing the net income by shareholders equity. Penny stocks with a positive ROE no matter how small indicates the company has value and is turning a profit. In other words it’s a sign of quality.
Technical Analysis Indicators – Technical Analysis is a way to predict a stock’s future performance based on past performance. One of the most important indicators is the MACD (Moving Average Convergence / Divergence) ratio. The MACD ratio measures whether a stock is trending up or down. The idea is that if a stock is trending up it has a tendency to continue that trend until of course the trend starts to change (which the MACD can also indicate). The most common parameters used in the MACD ratio are (12,26,9). Another popular indicator are moving averages, particularly the 50 day and 200 day moving averages. It is believed that if the stock is above the 50 day, it’s a positive sign and if the 50 day is above the 200 day, even more so.
Sound Business Model – There’s all sorts of companies out there and most of them love tooting their own horn, often sending out press release after press release in an attempt to get attention from both the traders and investors. Now some of these stocks may sound very tempting to buy but if the business model behind the company doesn’t make sense to you, don’t buy their stock. Simple as that. There are so many good micro-cap stocks out there with huge potential so why trade something you either don’t understand or don’t believe in?
Insider Buying – When company insiders are buying their own company’s stock, it’s a very positive indicator. The reason is quite simple. They believe in their company and the future growth of the stock; why else would they be buying? And who knows the true financial condition of a company better than those running it? Enough said.
Actively Promoted – This is one is especially significant to day traders and short term traders. Essentially, if a stock with a small float (i.e. very few outstanding shares) is being actively promoted by various IR companies, penny stock newsletters, paid pumpers and the like, the stock is very likely to appreciate in value, at least during the promotion. A typical promotion can last a day, a few days, or even several months. Like the other indicators, this one shouldn’t be used in isolation when finding good penny stocks to trade and timing a stock promotion can be very risky. That being said, this one factor should not be underestimated as it can have a huge impact on a microcap.
These indicators will go a long way in helping you find the very best penny stocks with the highest growth potential. Here’s to your financial success.
If you’re even remotely interested in trading penny stocks chances are you’ve come across and perhaps even been tempted by all those free penny stock newsletter and alert services scattered across the Internet. Heck even I have subscribed to a few in the past, mostly out of curiosity – I mean they just sound so appealing; the ability to receive endless free penny stock alerts without having to perform your own research which, lets face it, can be a huge undertaking. But the reality is these free stock alerts are not what they appear to be. I’m not going to go as far as calling them scams but they are definitely not objectively chosen stock picks. How can I say this for sure? Read on.
Why Are They Free?
It’s simple logic really. Ask yourself this – Why would a penny stock guru go through all the trouble of finding and performing analysis on penny stocks with high growth potential only to give them out freely to anyone who subscribes to their newsletter? Simple – they wouldn’t, unless of course they had something to gain from doing so. Now I’m not talking about a penny stock advisor offering a few free stock picks as part of a free trial to their service; that is legitimate and something completely different. But aside from a free trial there really is only one reason a so-called “penny stock expert” would give out a steady stream of free stock picks indefinitely – He’s actually a penny stock promoter!
The Penny Stock Promoter
So what is a penny stock promoter? A penny stock promoter, or often called “penny stock pumper”, is essentially someone who heavily promotes a penny stock because he is either financially compensated for doing so (normally by the company issuing the shares) or he himself has already invested in the stock and wants it to artificially rise in price. Once the pumping has taken effect and the stock starts to climb, the pumper will eventually dump their shares making a handsome profit at your expense! Now you may ask yourself, but hey the stock climbed so won’t I make a profit as well if I sell? Possibly yes but more often than not these pumped up stocks will fall very quickly as the pumpers dump their shares, leaving you very little chance of selling in time. Actually this type of scheme has a name: “the pump and dump”. Some of these pump and dumps are so elaborately planned often by several different stock promoters that the stock will climb and climb for days, even weeks before falling.
How to Spot a Penny Stock Promoter
So you might be asking yourself how you can identify a penny stock promoter versus a legitimate penny stock advisor. Well, aside from the fact that a true penny stocks advisor would never freely give out his picks indefinitely, you can also fairly easily spot a penny stock pumper by reading the fine print! Seriously, if you look at any of these sites or the e-mails they send out, they must legally have a disclaimer stating that they were either compensated for their “stock picks” or that their picks should be considered advertisements and not actual stock picks!
What About One Time Fee Newsletters?
Aside form the “free” newsletters, you may also come across one time fee newsletters. Basically they offer you a lifetime of stock picks for just one initial fee. That may sound good to you and perhaps more believable but these “newsletters” are actually even more of sham than the free ones. Not only are they just giving you pumped stock picks, they actually got you to pay from them! Imagine paying money for someone to advertise to you instead of providing actual well-researched stock picks?!
My Recommended Penny Stock Newsletters (Hint: they’re not free!)
So after all this you’re probably wondering whether there are legitimate newsletters out there that actually provide real and profitable stock picks? The answer is yes and guess what? All of them are not free! Instead, they are typically based on a paid monthly subscription. Now you may not like the idea of having to pay each month for a service but when you think about it, in this situation it makes perfect sense – If a professional trader runs a penny stocks newsletter and their subscribers are consistently making good money from the stock picks, chances are the subscribers are going to stay subscribed, I mean wouldn’t you? So it’s only in the newsletter’s best interest to provide top quality stocks picks that yield consistent profits, otherwise they’ll lose all their subscribers in no time (along with their reputation). That my friends is why a subscription based penny stock newsletter makes sense – it’s one of those rare win win situations.
So, without further ado, here are my two best penny stock alert newsletter recommendations:
#1. Microcap Millionaires ($97 per month) – Recommended for Beginner and Advanced Traders.
Micocap Millionaires is probably my favorite penny stock newsletter and alert service out there. It’s run by Matt Moris, a real down-to-earth guy who cuts the crap and simply gives out straight honest penny stock picks, the majority of which turn out to be profitable, some very profitable (100% and 200% gains are not uncommon). He provides 4 main types of stock picks (sub-penny stock alerts, bottom bouncer alerts, penny pump finder alerts, and reverse merger stock picks) all of which are long picks, meaning he selects stocks that have strong potential to go up in price. Since all his picks are long there aren’t any advanced trading techniques involved which makes this newsletter ideal for anyone interested in penny stock trading including new traders. In the alerts he sends out via e-mail and twitter, he includes the entry price (the price to buy at) and target price (the price to sell at). Now here’s some advice – follow these entry and target prices with discipline and don’t waver from them! Following them will make you some nice gains but ignoring his advice and getting greedy with a trade will more often than not leave you burned. Remember, you’re “trading penny stocks” not investing in them so stick to his picks and you’ll get the results. Click here for Microcap Millionaires.
#2. Timothy Sykes Penny Stocking Silver ($99.95 per month) – Recommended for Advanced Traders.
Timothy Sykes is another guru I like. This is the guy who turned $12,415 in Bar Mitzvah gift money into $1.65 million all while attending college and has been featured in just about every major business and financial media outlet including ABC, CNBC, CNN, and the The New York Times. Tim’s primary strategy is to use these pump and dump schemes I was speaking of earlier to his (and his subscribers) own advantage. Essentially he seeks out these pumped up or soon-to-be pumped up stocks and either buys and holds them, temporarily riding the artificial rise, or shorts them on the fall and then covers his position for some very large gains. For those unfamiliar with shorting a stock, it’s basically selling stock that you don’t own and then buying them back at ideally a lower price. This is achieved by your broker “lending” you the stock during that period of time. Now short selling penny stocks can be a highly profitable yet very risky game to play as your potential for losses is technically unlimited. You are also often not able to easily short most penny stocks unless your online broker allows it. Still for more advanced traders, following Timothy’s techniques can make you some serious returns. Click here for Timothy Sykes Penny Stocking Silver newsletter.
I’ve had a few questions come up lately regarding penny stock indexes versus individual stocks and why a trader would choose one over the other. Good question, but first for our beginners’ benefit, let’s define what a penny stocks index actually is. A penny stock index, like other indexes, is an investment vehicle comprised of stocks in the correct proportions that make up a particular section of a stock market, in this case micro-caps.
How to Buy Penny Stock Index Funds
You can’t actually go out and buy the penny stock index, unless you’re willing to buy each and every stock comprising it, a ludicrous idea in itself. Instead however you can buy what are called index funds which are investment vehicles that closely track a specific index. Though there are some actively managed penny stock funds out there I prefer a penny stock ETF (Exchange Traded Fund). The main difference between an actively managed mutual fund and an ETF is that with an ETF, the fund company is merely trying to replicate the index which translates to much lower management fees and less risk since you’re not relying on a particular money manager’s expertise. Of course some may argue that if the manager is particularly good at selecting penny stocks you can do far better with managed funds but again, be aware then that you’re hedging your bets on a single money manager versus the overall index. To each his own.
Now as mentioned in my other articles, a penny stock can be defined in a number of ways so you shouldn’t be surprised that fund company’s definitions of micro cap stocks vary as well. Some define them as any stock below a certain market cap (e.g. $300 million) while others simply take a set number of stocks from the index such as the bottom 1000 stocks by market cap and call them micro-caps. Regardless of how they’re defined however there a number of excellent low fee micro-cap funds worth considering.
Best Penny Stock Index Fund
One of the most popular, and best penny stock index funds as far as I’m concerned, is the iShares Russell Microcap Index Fund (NYSE: IWC). This index fund is based on the bottom 3% of the US stock market and the main reason I like this fund is its high liquidity and volatility, allowing you to easily day trade it, swing trade it, or even invest in it for the long term. Some of the other microcap funds worth mentioning include the Vanguard Small-Cap ETF (AMEX: VB), the PowerShares Zacks Micro-Cap ETF (NYSE: PZI), and the iShares Morningstar Small Core ETF (NYSE: JKJ).
The great thing about these penny stock ETFs is that like all other ETFs, they trade like regular stocks and can be bought and sold easily within your discount brokerage account. As such, they can also be shorted as a hedge or even bought on margin (though I wouldn’t suggest this unless you truly are a trading professional).
Benefits of Index Funds
So why buy a penny stock fund rather than a group of handpicked penny stocks? Well, it really depends on what you are trying to achieve in your investment portfolio. If you’re looking for aggressive growth but just can’t stomach the risks of individual penny stocks, a penny stock index fund might just be the investment vehicle you need. Though they will certainly not achieve the same level of gains a high potential penny stock pick can yield, they do provide higher growth potential than your average index fund or even blue chip stocks. Another big advantage is that you no longer have to worry about the large amount of risk associated with individual small cap companies since in essence you are well diversified, investing in hundreds of stocks through one investment unit.
Drawbacks of Index funds
The main downside of a penny stock fund however is that, well it’s a fund and no matter how well the fund performs, it can never achieve the same results a few good penny stocks can yield. In other words you’ll never see a fund gain 50% in one day, let alone 1000%, which can definitely happen with the right penny stock.
So in a nutshell, though a penny stock index can make an excellent addition to your portfolio and be used for certain investment strategies, if you’re in the market to make significant returns in a relatively short period of time, there really is no substitute for trading penny stocks. If you do go down the path of individual stocks however, you have to recognize the extra risk you’re taking on and thus should do everything in your power to help mitigate that risk. Use stop losses, limit penny stocks to a small percentage of your stock portfolio, never invest more than 5% of your equity in any one stock, consult a reputable financial advisor, and above all never use money you can’t afford to lose.
If you’re like most penny stock traders or investors, you’re more than likely always on the lookout for good penny stocks to watch and potentially buy should the stock reach your target entry price. Penny stock opportunities come and go each day however, so instead of just providing you a list of penny stocks to look out for tomorrow (which will be pretty much useless to you the day after), I want to help educate you in the types of attributes to look for in a penny stock so that you are able to form your own penny stock list at any time.
The example I’ll be using to illustrate my points at the present time is Great Western Minerals Group (GWG.V). Disclaimer – I own shares of GWG and will be merely using this stock as an example. What is right for me may not be right for you so always consult with a licensed financial advisor before making any investment decision. Now let’s get started.
The first area I’d like to touch on is whether the stock falls under a sector that is currently favored in the market. There is some truth to the saying “a rising tide lifts all boats”, meaning, if the particular sector you invest in is favored in the market, in general the stocks falling under this sector will do well. So, if you’re trying to decide between two great penny stocks and one is in a hot sector, why not choose the one in the favored sector? – It can only help the stock’s potential. In our example, Great Western Minerals is in the rare earth minerals exploration and mining sector which is presently quite bullish.
Potential for Massive Gains
In addition to being in a bullish sector, the stock should have a very promising outlook in both the short and long term. In our example, Great Western Minerals, if we look at the current situation, China mines over 95% of the world’s rare earth minerals. These minerals are essential to manufacture a large number of products including computers, wind turbines, automobiles, and mobile phones. China has been using their near monopoly of these minerals for political gain, even going so far as to blocking shipments to Japan, Europe and even the United States. One can only imagine what would happen if China stopped shipments altogether to these countries. As such there is a massive push to source these minerals from other parts of the world and promising companies like Great Western, are doing just that. In this type of environment, such a penny stock has the potential for truly massive gains which is the type of penny stock you want to look for. Penny stocks are inherently risky so why not choose one that has a large amount of potential.
Healthy Balance Sheet
Regardless of how great the story is behind a stock, what’s equally important is how the balance sheet looks and particular how much debt a company has taken on. Companies with large amounts of debt and little to no income are high risk so it’s always better to choose a stock that is well financed with large amounts of capital and limited debt. Even better is to find one that is also yielding a profit, though good penny stocks like these are hard to come by especially in sectors like mineral exploration.
Bullish Chart Pattern
Since I’m more of a technical trader, I’d say this is probably the most important point to consider. The first three points I mentioned should help you find some great penny stocks to watch but the chart is what will tell you when to actually buy them.
When evaluating a stock’s chart I like to look at both the short term (past 6 months) and long term (past 3+ years) though I find the longer term chart paints a clearer picture of where the stock is headed. Let’s look at Great West’s long term chart as an example.
As you can see from the chart, there are key characteristics that make this stock attractive. Firstly, in general there has been higher volume as the stock price rises compared to when it falls. This indicates confident buying – a bullish sign. Secondly, the stock was in a bearish downward channel but has since broken free to the upside and now resides in a bullish rising trend channel. Thirdly, the stock’s 50-week moving average has crossed the 200-week moving average, otherwise known as a bullish crossover. I’ve found this crossover pattern in particular to be a very positive sign to a stock’s long term outlook.
So this stock is definitely one to watch but is it one to buy now? Perhaps, however I personally might wait first for the MACD to clearly trend upwards again since it’s currently threatening to crossover to the downside which would be bearish.
Of course, I’ve only really touched on a few aspects of technical analysis. To be able to perform adequate TA you really should consider taking a technical analysis course or at the very least, read a good book on the topic – It truly can make or break you as a penny stock investor. As always however, consult with a licensed financial advisor before making any investment decisions.
I’ve often found that many investors speak of penny stock investing as if it were the same as penny stock trading. This is actually a common misconception, not just with penny stocks but with all other types of stocks. Trading and investing are two completely different methodologies for building wealth, each with their own advantages. Thus, it’s important to understand the difference between the two and then decide whether you are penny stock investor or trader.
Penny Stock Trading
Trading penny stocks is probably the most popular of the two models, not because it’s any more profitable long term but because you can make a lot of money in a short period of time. The problem is of course that it’s a two-edged sword in that you can equally lose a lot of money very quickly. Penny stock trading methodologies include intra-day trading, swing trading, momentum trading, technical trading, even fundamental trading. Each of these techniques have their own pros and cons but the point is that they are all executed either within the same day (i.e. day trading) or over the course of a few days or weeks. Trading penny stocks is not for the weak of heart – you have to continually monitor your trades via level 2 quotes and be prepared to get out at a moments notice.
Penny Stock Investing
Investing in penny stocks is a completely different animal altogether. After searching for some good penny stocks with greater than average growth potential, you buy and hold them for months, even years at time. It may seem risky, even absurd to some traders to hold penny stocks for that long but that is probably because they are traders, not investors. Remember, just because a stock trades on the pink sheets or has very low capitalization, it doesn’t automatically mean it’s junk. There are plenty of penny stock investment opportunities out there with potential for high gains over the long term, you just have to know how to find them.
How to Invest in Penny Stocks
So how do you invest in penny stocks? Firstly, read my post on the finding the best penny stocks to buy in order to better understand what makes a quality penny stock. Secondly, consider consulting a good penny stock broker, penny stock analyst, or even subscribe to a reputable penny stock newsletter. Lastly, only buy companies you can understand. What I mean by this is if you work in the mining sector you probably have a pretty good idea of what to look for in an up-and-coming mining or exploration company but if you’re in the food industry, don’t even pretend to guess which gold penny stocks look promising. Instead, focus on what you know and you’ll already have a built-in advantage.
Consider a Penny Stock Fund
Another good option for those of you who want to invest in penny stocks but have very little expertise in finding good penny stocks to watch, is to consider a good penny stock mutual fund or ETF. An ETF stands for Exchange Traded Fund; they are essentially funds that closely follow a particular index or sector with much lower expense ratios than managed mutual funds. The advantage of investing in something like the Russell Microcap Index ETF (IWC on the NYSE) is that you can add it into your portfolio and leave it for the long term without having to frequently monitor it. This way you get the excellent growth potential from emerging penny stocks without the excessive risk and maintenance.
Out of all the various trading strategies out there, day trading penny stocks is probably one of the most profitable and risky. In simple terms, day trading penny stock involves buying and selling a stock within one trading day. In other words, you would start and end the day holding only cash with no open stock positions. Intra-day trading is inherently risky yet when done correctly can also be extremely profitable. Like all things, especially in the world of investing, the higher the risk the higher potential reward.
There are essentially three main attributes to look for in a penny stock trading candidate:
If you’re going to be day trading a penny stock, you better be sure it is highly liquid, meaning it trades throughout the day with high volume. Without high volume, the spread between the bid and ask price can be so wide, you won’t be able buy penny stocks at a competitive price and even if you manage to buy some stock and can easily get stuck with shares you simply can’t sell before the end of the trading day.
We’re often taught by investing experts to avoid highly volatile stocks but when you day trade penny stocks, this is exactly the type of stock you want. Stocks that have wide daily trading ranges offer better opportunities for profits compared to those that trade flat.
When day trading penny stocks, don’t trade junk. Remember, you will be buying these stocks and holding them for a period of time, however short that might be. As such, there’s always a chance you may be left holding shares after the close so you better pick stocks you wouldn’t mind holding to the next trading day. There are gutsy traders that will trade just about any stock but I say why bother; there’s plenty of quality companies out there you can profit from, so why take on even more risk than you need to?
Once a few good penny stocks have been short listed, when trading penny stocks there are some basic strategies traders will typically use to help minimize risks and maximize gains:
Scalping is probably one of the more popular strategies due to its simplicity. With scalp trading you are essentially taking advantage of market inefficiencies with respect to the spread. The gap between the bid and ask price (i.e. the spread) can narrow and widen rapidly throughout the day creating buying and selling opportunities for quick profits. In order to scalp successfully, you’ll need access to Real Time Level II Quotes which is normally available from most penny stock brokerages.
With all other things being equal, stocks will often trade in a set trading range throughout the day. With range trading your goal is to buy at the bottom of that range and sell near the top (or vice versa when shorting). If implementing this strategy, look for stocks that appear to have a fairly consistent trading range from day to day.
Momentum or Trend Trading
Have you ever heard the phrase “the trend is your friend”? Well, with trading penny stocks, identifying trends through technical analysis and buying and selling according to that trend, can prove to be very profitable. In basic terms, with trend trading, you buy a stock when it is trending up and sell as soon as it reverses that trend or conversely when shorting the stock you short sell it when trending down and cover your position at the point it starts to recover.
Real-time News Trading
Another common strategy used by traders is to buy penny stocks the moment good news is released and sell after the punch up or short the stock on negative news and buy back after the news has settled. This type of trading can be achieved through the use of a real-time news feed.
The rewards from online penny stock trading can be very great yet the stark reality is most penny stock day traders end up being unsuccessful so regardless of what strategy you decide to use, always try to limit your risk by using stop loss orders and never risk more than you can afford to lose. In addition, day trading penny stocks should be limited to a small portion of your overall portfolio.
Choosing the best penny stock brokers for your trading style is a very individual decision. Each broker has a different pricing structure for buying penny stocks or a large block of stocks. You need to understand how you intend on trading before choosing online penny stock brokers in order to better gauge how much money your orders will cost you. If you have an eradicate trading style than you may want to open an account with multiple brokers so that you can use the proper broker for the proper trade. For the new penny stock trader, keeping your commissions under control can be the difference between profitability and bankruptcy. For the advanced penny stock trader, you already know that one website order drop or delayed order fill can turn the best trade of the year into a missed opportunity or even a nightmare.
Here are a few of the top penny stock brokers and their differences.
Zecco is dirt cheap, no doubt about it. They are currently at $4.50 per trade with no “per share” fees. The only problem is they don’t emphasize penny stocks in their trading. Normally, this means they don’t know the penny stock community. They are really great though if you also do forex and option trading. If you are a smaller trader this is a great option because the low flat fee makes the commission percent of trade very manageable.
TDAmeritrade is a little more expensive stock broker. The good part is they have a emphasis on OTCBB or pink sheet trades for the same flat fee of $9.99 per trade. This company is very established with very powerful charting tools and the ability to trade pre and post trading hours. This is great for those nano companies that love to give press releases at the closing bell.
ChoiceTrade is another cheap option at a flat $5 per trade fee. They also offer mobile trading (for you cell phone junkies) and direct access trading. If you are a scalper or large trader than direct access allows you to bypass the web portal and order batching. Your order directly hits the market on your own. The bad part of ChoiceTrade is they charge for almost all of their information services on a monthly basis. These nickel and diming fees are both annoying and draining when your trading is going poorly.
SogoTrade is probably my favorite unknown online broker. They are only $3 per trade! However, for the true penny stock traders (Under $1 per share) they add ½% of the trade value for each trade. They have great trade execution (basically a virtual direct connection) and no inactivity, information, charting, or any other hidden fees.
I question LowTrades simply because they won’t post their pink sheet fees. They have a nice low $4.95 flat fee, but they say there are settlement fees for OTC stock trades, but they are not listed anywhere. That just screams trouble to me, so I haven’t even bothered to try them.
Scottrade has a $7 fee with a ½% principal fee for stocks under $1 per share. However, they are a powerhouse in the industry. They offer quality information and charting systems and how massive trading power since the volume of dollars they move affords them the best stock traders and programmers.
In summary, though there isn’t one best penny stock broker for everyone, if you’re brand new to penny stock trading I recommend you just go the cheapest route which would be Zecco unless you are only doing NASDAQ penny stocks ($5 per share) in which case I would probably choose SogoTrade. If you are a larger investor I would go with ChoiceTrade for the quality direct access or Scottrade for the professional platforms.
Successful penny stock strategies often focus on technical analysis as a way to buy profitable penny stocks with maximum returns. However, I believe the fundamentals of a company are equally important in order to help minimize risk and increase the odds of scoring a high yielding penny stock.
Stereotypically speaking, penny stocks are companies just starting up and in need of capital. They are indeed very risky in nature but if the chosen company is successful, they can provide a huge return on investment. But how do you identify a good company with great potential? Here are some factors to consider:
Innovative Ideas and Competent Management
Finding companies that will take off is not an exact science. It requires significant research and a little bit of luck. However if you know what to look for, you can dramatically increase your chances of picking the right stocks.
A successful company needs something that sets it apart; a way of delivering a known product more effectively, a new product, or even a whole new concept. It is up to you to scout out the companies and judge for yourself if their ideas hold water.
Secondly, a company starting up needs competent management. A company with a great idea can easily fail if thoroughly mismanaged. Judging whether the people behind a company are talented can be extremely difficult but look at what experience they have, if they seem trustworthy, and whether they are passionate about what they are doing. Also, see whether they actually hold stock (insider buying). If they hold stocks, chances are they truly believe in the company and its future.
Healthy Balance Sheet
Probably the most important factor to consider when making profitable penny stock picks is does the company have a healthy balance sheet? Do they have significant debt and are they turning a profit? What is their cash burn and how much cash do they have on-hand? These are the types of questions you need to answer before even considering to buy penny stocks of a particular company.
Diversify Your Portfolio
No matter how well you pick your penny stocks, you will still be making very risky investments. To reduce the risk you need to diversify. Ideally, you want to invest in other, more secure assets, such as bonds, ETFs, or stocks of established companies like blue chip stocks. If you only invest in penny stocks (not advisable), you especially need to pick multiple companies. Remember, you want to buy profitable penny stocks, as in more than one; never put all your eggs in one basket.
It shouldn’t come as a surprise that penny stock investing is not for the faint of heart. However, implementing some of the core concepts discussed will increase your chances of a profitable outcome.
There are essentially three different options when choosing where to buy penny stocks: A discount brokerage firm, a full service brokerage firm, and a money manager or investment advisor.
A lot of people just go with a discount brokerage firm because it’s cheaper. I believe this is fine for seasoned investors but not if your new to stock trading, especially penny stock trading, due to its highly volatile nature. There are many good discount brokerage firms and pretty much all of them are accessible online. A discount brokerage account will allow you to buy and sell stocks online at the click of a button. They normally will charge you a set commission per transaction though many will lower the commission if you are a high volume trader. Some good discount brokerage companies include Interactive Brokers , TD Ameritrade, E*Trade, and Charles Schwab. Just make sure you compare the services offered and their fee schedules as depending on the type and quantity of trades you perform, one firm may be more cost effective than another.
Full Service Brokerage
Despite the growing popularity of discount brokerages, there are still a good number of investors who prefer full service brokerages when deciding where to buy penny stocks. Full service brokerages though typically more expensive, offer a much greater level of service for investors including general investment advice, executing trades on your behalf, and even recommendations on which stocks to buy and when to sell them. For investors with limited knowledge, particularly those who wish to buy penny stocks, a full service brokerage could be a good choice. Just be sure you go with a reputable company you find a stock broker you can trust and that has experience buying penny stocks. Some of the better full service brokerage houses include JPMorgan, AG Edwards, Merrill Lynch, Morgan Stanley, and UBS Financial Services.
Money Manager / Investment Advisor
Finally, for those who not want to even think about which trades to perform and when, you can find a Money Manager also known as an Investment Advisor. Though most people think of money managers as those who manage mutual funds, money managers can actually manage any type of investment. A money manager is someone who will manage your account, make trades based on their expertise, and keep you up-to-date on the progress of your account. Though some money manager are tied to brokerage houses there are still many who are completely independent. Now since our focus is with penny stocks, you will want to find one who has a proven track record trading them. Finally if you choose to have a money manager, it’s very important to find one you can trust and that has a strong reputation in the financial industry.
With an interest in buying penny stocks, you almost certainly would have heard the term “pink sheets” or just “pinks” at least once. The term “pink sheets” actually comes from the color of paper the stock quotes were originally printed on but now it refers to the electronic quotation system used for a variety of OTC securities.
Pink sheets penny stocks are essentially stocks with a price below $5.00 that trade on the Pink Sheets electronic quotation service. But what exactly is the pink sheets and how does it differ from the OTCBB and major markets like the NASDAQ and NYSE?
An important point to note about the pink sheets is that it is not a registered stock exchange but a computerized quotation system and the stocks that are listed on the pink sheets are generally stocks that could not meet the specific requirements of a major stock exchange. Furthermore, unlike stock exchanges the pink sheets are not regulated by the Securities and Exchange Commission (SEC). As such there are virtually no requirements for historical or even current financial data though companies issuing stock on the Pink Sheets are at least bound by both federal and state security laws.
Obviously due to the lack of regulation, the pink sheets can be a dangerous place to buy penny stocks. Therefore, you really need to perform your due diligence on any potential company your interested buying stock in. Companies can vanish with out a trace from the pink sheets along with your hard earned cash. Due to these factors in addition to the extreme volatility and unpredictability of pink sheets penny stocks, it’s highly recommended that an investor stick to trading with money he can afford to lose and no more than 10% of of his portfolio.
Having said all this, by exercising both caution and experience and by implementing specific stock strategies, a lot of money can be made in the pink sheets. Why? Simply, pink sheets stocks can double or triple in price very easily. A 5 cent share for example can quite easily become a 10 cent or 25 cent share in a matter of weeks, leaving a 100% or 400% gain respectfully. Seeing that the average stock goes up a measly 6% per year, it’s very easy to see the lure of penny stock investing.
Whether you decide to buy penny stocks on the pink sheets or on the OTCBB, by being very selective in the stocks you choose in addition to using various proven stock strategies to limit your risk, this portion of your overall portfolio can very easily become your most profitable one.
One of the first questions you may have is how to buy penny stocks. Before we get there though, you should first understand a little about what penny stocks are.
Penny stocks, also known as nano stocks, dollar stocks, and micro cap stocks are by definition any stock trading below $5 per share. As such, penny stocks do not typically trade on major stock markets like the National Association of Securities Dealers (NASDAQ) or the New York Stock Exchange (NYSE), unless of course the stock temporarily dips below $5. Instead, you will find penny stocks listed on the over-the-counter (OTC) and the Pink Sheets markets. Unlike the OTC however, the companies listed on the Pink Sheets market do not need to file current financial reports with the Securities and Exchange Commission (SEC).
So, how to buy penny stocks? Well, similarly to buying other types of stocks, your main two options for buying penny stocks are via a full service brokerage or using a Discount Brokerage account.
Full Service Brokerage
Using a full service brokerage will mean dealing with a real live stock broker. You give your broker (usually done over the phone) the number of shares you wish to buy, the maximum price you wish to pay, and the ticker symbol of the stock. The stock broker would then attempt to purchase these stocks on your behalf. The stock broker gets payed either through a commission per transaction or more commonly through principle transactions, meaning they would make money on the difference between the bid price and ask price, known as the spread. The main advantage to using a full service brokerage account is that your stock broker can typically give you investing advice as well as facilitating the trades for you. The main disadvantage however, is these services are typically expensive. If you decide on a stock broker, be sure to find one that is reputable and trustworthy with a solid track record.
Alternatively, you may create an account with a Discount Brokerage firm. Once you’ve created an account, you can make trades online and with relatively little effort. The main advantage with a discount brokerage account is that it’s much cheaper than using a full service brokerage but you need to know what your doing so it’s not advised for novice investors. Also, for very thinly traded penny stocks, you may simply not be able to execute your desired trades for the price you want without the use of a stock broker who has more resources at hand.
Knowing how to purchase penny stocks is one thing but knowing what stocks to buy and when to sell them is another. Remember, trading penny stocks has a very high risk attached to it. Yes the rewards can also be great, but you need to know what you’re doing so whatever you do, don’t just go off and start buying random penny stocks hoping they’ll appreciate in value. Get educated first.
If you’re wanting to profit from penny stocks, you might want to look beyond the US borders (assuming that is where you live) and more specifically pay attention to Canada. A lot of investors who specialize in micro cap stocks love Canadian penny stocks and for good reason.
Canadian penny stocks and Canadian stocks in general have performed extremely well the past several years compared to the rest of the world. Canada, like the US is a very stable democratic country with low risk for political or economic instability. However, Canada is also extremely rich in natural resources including oil and precious metals which have all been skyrocketing in recent years along with the stocks related to these commodities. Canadian gold penny stocks and oil penny stocks in particular have done very well and made a lot of penny stock investors small penny stock fortunes!
With that said, how do you get your hands on Canadian penny stocks? In a nutshell, Canadian penny stocks can be found in five different markets: the pink sheets, OTCBB, the Toronto Stock Exchange, the TSX Venture Exchange, and to a lesser degree, the Montreal Exchange. The pink sheets and OTCBB are US markets and trade in USD. The other three are all Canadian stock markets and thus trade in Canadian currencies. The Toronto Stock Exchange is by far the largest and most reputable Canadian stock exchange with the strictest regulations. The Venture Exchange however is probably where you’ll find the most penny stocks and in particular, precious metal penny stocks.
Now that you know a bit about what markets Canadian penny stocks trade in, you really have two main options as far as how to actually buy them. The first option is to open a Canadian brokerage account whether it be a discount brokerage or full service brokerage. Some popular Canadian discount brokerage companies include Scotia itrade (formally E*trade Canada), Interactive Brokers, RBC Direct Investing, and CIBC Investor’s Edge. Full service brokerage firms include BMO Nesbitt Burns, RBC Dominion Securities, and Laurentian Bank Securities. The second option is to open a US brokerage account that allows trades in Canadian equities or to simply buy Canadian penny stocks via the pink sheets or OTCBB markets. The OTCBB especially often has the USD equivalent version of a Canadian penny stock that can be purchased in US funds.
No matter which option you choose, buying Canadian penny stocks is not difficult and the rewards can be great. Just make sure you always peform adequate penny stock analysis and research on each company just like you would before buying any stock investment.