WHAT ARE PENNY STOCKS?
Contrary to popular belief; penny stocks aren’t just securities priced under $1. The SEC (Securities and Exchange Commission) defines penny stocks as any stock trading under $5.
As per the SEC’s Penny Stock Rules:
The term "penny stock" generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.
Trading at $5 dollars or less, penny stocks offer you the ability to buy large quantities of a stock for a very low price. It is no wonder; new traders are drawn to the world of trading penny stocks. On the surface, it makes sense why folks are more inclined to invest in these lower priced securities. I suspect, there is some ‘logic’ in believing it is far wiser to buy 10,000 shares of a stock that cost (.25 cents) than 100 shares of a stock that cost ($25 dollars). Or maybe it’s more logical to think that it’s easier for a .25 cent stock to trade up to .50 vs a $100 stock doubling to $200. Whatever the reason, penny stocks tends to attract a lot of new investors and for those reason; I feel it is our obligation to inform you all about penny stock trading.
In this article, I will do my very best to discuss what I think you need to know starting out as a penny stock trader.
HOW TO BUY PENNY STOCKS (THINGS TO CONSIDER)
BEST PENNY STOCK BROKERS TO USE IN 2019
The very first thing you’re going to want to decide on is what’s the best online broker to use to buy penny stocks. There’s a wealth of brokers to choose from but ultimately; the one you choose should be based on your personal needs and goals. A few things to help you along your decision making process is:
How much will you be charged to execute each trade?
Are you familiar with the broker’s trading platform? Is it user friendly and easy to navigate? I have used my fair share of trading platforms and all are not created equal. Some are easier to navigate than others. The last thing you want is to have to place an order on a platform that’s confusing. This is often overlooked but an area I feel you should take some time on. Again, make sure you’re comfortable with your broker's trading platform.
Make sure it's easy to access a customer service representative in the event something goes wrong. I am aware that a lot of newsletter services advocate opening accounts offshore to get around certain “PDT” restrictions but I would be cautious in placing my monies in another country that I’ve never visited or reside in. Again, make sure you can contact a customer service representative with ease.
Taking the time out to get the right broker can go a long way.
Find below Penny Stock Brokers (2019) and a summary of their fees:
Please be aware that the above list is not an end all but a few of the popular online brokers.
FUNDAMENTAL ANALYSIS VS. TECHNICAL ANALYSIS
Once you’ve selected the best broker that fits your individual needs, the next step is deciding on how you’re going to approach the stock market. Are you going to be a fundamental penny stock trader or a penny stock trader that uses technical analysis? Find below the differences with each approach.
FUNDAMENTAL ANALYSIS OF PENNY STOCKS
Traders who use fundamental analysis to inform their trading decisions are generally traders that examines a company’s fundamental picture and assesses the company for financial security. This analysis includes examining a company’s revenues, earnings, future growth, return on equity, profit margins, and other metrics to determine a company's growth prospects and financial health. In other words, fundamental analysis is looking at the company’s overall health and growth rate. Is the company making money or at minimum, losing less money over time? Does the company have a good product that’s about to hit the market or are they working on a revolutionary drug that can cure an ailment?
If you use fundamental analysis to trade or invest in penny stocks, expect to spend a great deal of time doing the much-needed research.
TECHNICAL ANALYSIS OF PENNY STOCKS
Technical analysis refers to the utilization of charts and chart patterns to determine where a stock price is going. As a trader, if you decide on this approach, whether or not you decide to buy a stock will be dependent on your level of understanding of the stock chart.
For up-to-date technical analysis; make sure to follow us on YouTube. We do daily technical analysis recaps.
TECHNICAL AND FUNDAMENTAL ANALYSIS
The best of both worlds! While you are sure to find traders on the extreme end of each style; there’s plenty of us that enjoy the middle ground. That is, you’ll find your fair share of investors who utilize both fundamental and technical analysis to inform their trading and investing decisions. If you find that you’re equally committed to both styles of trading after reading this article; don’t feel pressured to commit to only one side.
A wise [wo]man once said; ‘the best traders use fundamental analysis to determine what to buy and technical analysis to decide on when to buy’.
DAY TRADING VS. SWING TRADING
If you’re new to the world of penny stock trading; I am fairly certain that you’ve heard the term ‘day trading’ or ‘day trader’. These are very common terms in the trading world and can be viewed as synonymous with penny stock trading.
I bring this up because once you’ve decided on your broker, decided on your approach (fundamental vs technical); your next step is deciding on time frame. That is; are you going to ‘buy and hold’ penny stocks? Day trade penny stocks? Or swing trade penny stocks?
Because of the inherent risks associated with investing in penny stocks, you’ll seldom find investors who ‘buy and hold’ these securities for an extended period (think over 5 years); because of this, I have decided to forego elaborating on what it means to be a buy and hold investor.
In this section we will briefly discuss what it means to day trade penny stocks vs swing trading penny stocks.
DAY TRADING PENNY STOCKS
What is Day Trading?
Day trade or Day trading refers to the buying and selling of stocks within the same day. A day trader will enter and exit his position in a security within that day. The objective of day trading (outside of making money) is to ensure that all positions are liquidated by the end of the day, thus, not assuming any potential overnight risks. In order to engage in day trading, individuals must have at least $25,000 in their stock trading account. Click HERE to see what the SEC has to say about day trading.
Day trading penny stocks
If you decide on becoming a day trader, like the definition states; all your positions will be opened and closed on the same day.
SWING TRADING PENNY STOCKS
What is Swing Trading?
Swing Trading is a style of trading that looks to capitalize off a securities short-term price movement. Your typical swing trader will hold a stock for a few days, up to a few weeks--no longer than a few months. The objective of swing trading is to capture "the meat" of a stock's move in a short period of time.
Overall, swing traders look to long stocks in an advancing or bull market- -conversely, they seek to mainly short stocks in a bear or declining market.
Swing trading penny stocks
If you decide on swing trading penny stocks, expect to hold your positions for a few days or a few weeks.
WHAT STYLE IS BEST FOR TRADING PENNY STOCKS
As you should already know from our website; we prefer swing trading stocks within our community at shortmetina.com. I can make, if pressed, a very compelling argument in favor of my style of trading but that would be unfair to you as an individual. The objective of trading and investing is to make money. With that said, it is ultimately up to YOU, the individual trader, to decide on what style of trading you feel more comfortable with.
TIP: Try both styles for a few months and see which one resonates well with you.
WHERE TO BUY PENNY STOCKS
Penny stocks are traded on major exchanges and OTC/PINK SHEETS.
The New York Stock Exchange (NYSE)
BATS Global Markets
OTC Bulletin Board (OTCBB)
HOW CAN I FIGURE OUT THE BEST PENNY STOCKS TO BUY IN 2019?
There are a few ways to go about this; I will explore two.
Option #1- DIY (DO IT YOURSELF) APPROACH
If you’re a ‘do it yourself’ type of person then you can simply start by visiting free financial websites such as: Yahoo!, Google, or Finviz and begin utilizing their free scanners. You can filter the search by price, industry, sector and any other metric you deem relevant. Once you’ve received the desired results in your scanner you can begin narrowing down your options.
TIP: If you’re doing fundamental analysis then you may want to start by getting a quick snap shot of the company’s financials before digging deeper. If you’re doing technical analysis then you can quickly insert the ticker in your preferred charting software and begin the process of narrowing down your options.
FREE PENNY STOCK SCANNERS
Option #2- NEWSLETTER SUBSCRIPTION
You can hire us to do the searching for you by signing up to one of our paid subscription services.
CAN YOU MAKE MONEY TRADING PENNY STOCKS?
The short answer is, yes. Yes, you can make money trading penny stocks (refer to our Glu Mobile case study) but because of their inherent risky nature, it is best to exercise caution.
GLUU MOBILE (GLUU) PENNY STOCK CASE STUDY
About Glu Mobile
Glu Mobile (NASDAQ: GLUU) is a leading creator of mobile games. Founded in 2001, Glu is headquartered in San Francisco with Bay Area studios in Burlingame and San Mateo, and international locations in Toronto and Hyderabad. With a history spanning over a decade, Glu’s culture is rooted in taking smart risks and fostering creativity to deliver world-class interactive experiences for our players. Glu’s diverse portfolio features top-grossing and award-winning original and licensed IP titles including, Cooking DASH, Covet Fashion, Deer Hunter, Design Home, MLB Tap Sports Baseball and Kim Kardashian: Hollywood available worldwide on various platforms including the App Store and Google Play.
We have a good reputation for picking stocks that double, and sometimes triple within our community. Glu Mobile proved to be one such trade; with the stock gaining a whopping 321% at its peak price.
We entered the stock with an average price of $2.47. The entry wasn’t based on a ‘whim’; hunch or any other emotions traders experience. Our entry was based on a specific strategy we use to enter trades. Once our signal presented itself, we entered the stock and managed to hold (based on our system) until our target was hit. Providing our premium members with over 100% in stock market gains. Refer to chart below to see the full picture.
The Chart (Technical Analysis)
WHAT WE LOOK FOR
Our system is rather simple and is shared with our members. If you’re ready to become a part of the ShortMeTina community; you can do so HERE.
When we trade penny stocks we assume ALL inherent risks and ensure we are always following our trading system and plan.
With that said; as in the case with Glu Mobile and some of our other huge penny stock winners, we try our best to focus on quality companies and quality set-ups.
We don’t concern ourselves too much with pink sheet trading or questionable corporations. We focus on companies with real products, or at minimum, a promising pipeline drug. If you narrow your focus to only the best companies and the best trading set-ups, you should do relatively well in the long run.
ONE OF THE BEST STRATEGIES TO USE TO TRADE PENNY STOCKS
I am about to share with you a strategy that is relatively easy to spot and trade. We call this strategy, ‘the break out’. It is one of my all-time favorite techniques to deploy in ranging bull markets and a classic among traders.
As the name suggests, you’re buying a stock when it breaks above a specific price point. What do I mean by, buy the break out? (refer to example below).
TIP: For the most effectiveness: Don’t buy the stock on the first break out, wait and buy the stock on the “pull back”. The high, once acting as resistance, is now support (demonstrated below by the blue line).
MISTAKES BEGINNERS MAKE WHEN INVESTING IN PENNY STOCKS (AVOID AT ALL COSTS)
Top 4 mistakes beginners make when trading penny stocks
This goes without saying but if you’ve made any of the mistakes I am about to talk about in this article; consider them a rite of passage. As a beginner, mistakes are almost inevitable. Below are the 4 mistakes I think most novice traders make when they begin trading penny stocks. Get familiar with them and do your best to avoid them at all costs!
New traders come to the stock market with all their chips in one hand; betting a hefty portion of their investment capital on one trade. The saying, “don’t put all your eggs in one basket” has passed the test of time for a reason. You hear it time and time again because there’s some truth to the phrase. Knowing this, don’t bet the farm folks. In the stock market, you essentially have a 50/50 chance. You’re either right on the trade or you’re wrong on the trade. Considering you have a 50% chance of being wrong; betting all your capital on one trade is just asking for trouble.
TIP: Come up with a comfortable dollar amount or percentage to place on each trade.
#2 NO TRADING PLAN
Trading without a trading plan is like trying to get a destination without a road map or a navigator. It makes your job difficult and unnecessarily complex. A plan can include, where you want to enter a trade, where you want to exit the trade, how many shares you want to buy, etc.
TIP: Come up with your trading plan BEFORE you place your trade.
Overtrading! As a new trader, you shouldn’t trade 5-10 plus times a day. Commission alone will eventually knock you out the game; if the seasoned traders don’t do it first.
What you should be doing around this time is learning as much about the stock market as you possibly can.
TIP: Trade your BEST ideas.
#4 HOLDING ONTO LOSING TRADES
Investment billionaire, Paul Tudor stated “losers average losers”. The quote doesn’t necessarily reference to cutting losers quickly but he’s speaking to this idea of holding on to a losing position. I find new traders, for whatever reason, have a hard time cutting losses. It serves you no good and will only keep you awake at nights holding on to a losing position.
Take away: CUT LOSSES QUICKLY!!!
ARE THERE RISKS TO INVESTING IN PENNY STOCKS
You bet ya! Stocks trading for pennies on the dollar are doing so for very good reasons. They aren’t the best companies.
These are companies with drugs in the clinical stages of development.
Companies with a proof of concept but no real product.
Companies that are losing money hand over fist and the list goes on.
Point is, these companies aren’t the cream of the crop, most of them are crap companies and crap stocks. Hence why it’s so important to do the much-needed research before putting your money behind a company that’s trading for under $5.
It’s also important to watch out for bad actors in the stock market. We’ve all heard of them before. These bad actors in the stock market are snake oil salesmen trying to steal your hard-earned money from you.
Have you seen the movie, “The Wolf of Wall Street”? Without giving too much away; the main character, Jordan Belfort, was said bad actor pushing unscrupulous stocks to unsuspecting investors. He made multi-millions defrauding investors in what is known as a ‘pump and dump’ scheme. While much of his scheming occurred in the 1980s-1990s; pump and dump schemes continue to happen to new and unsuspecting traders.
Need not worry my fellow trader; I have you covered and will go over pump and dumps and how to avoid them.
PENNY STOCKS PUMP AND DUMP SCHEMES
What is a Pump and Dump?
As per the SEC (Security and Exchange Commissions):
“Pump-and-dump” schemes involve the touting of a company’s stock (typically small, so-called “microcap” companies) through false and misleading statements to the marketplace. These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms. Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create. Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money.
THE 4 STAGES OF A PENNY STOCK ‘PUMP AND DUMP’ SCHEME.
I wrote a brief article a few years back essentially summing up how to spot these schemes; find a summary of the article below.
Stage #1 Accumulation
This is where the orchestrators of the pump accumulate the stock. The accumulation time varies but it’s usually a few days to a few weeks. It’s virtually easy to detect when the accumulation is occurring by looking at the company’s stock chart. If you add the volume indicator (as shown in this real life example), there is an instant spike in volume. The stock virtually goes from dormant to active overnight. This is where the beginners of the pump and dump scheme “buy-in”. Notice, while there is a spike in volume; the range of the stock doesn’t go far. This is purposeful. You want to buy up in huge quantities without spiking the price too much.
Stage #2 The Pump
This is the part where attention needs to be drawn to the stock. The orchestrators need investors and/or traders to sell their shares to at a higher price. How do they do this? Well, like I stated before; they need to draw attention to the stock. It can take many forms but the most common is through promotion. It helps if there is a compelling story about the stock and the company. Perhaps, the company is the next Google. Perhaps, it will revolutionize how we drive our cars, consume our cable television, pay our bills, etc. Point is, ensure that the story is believable and compelling. If you can somehow associate a celebrity with the stock and product this can help as well. Again, the objective here is to sell the story.
Stage #3 Stock Price Increase
The “pump” is working. The story is believable and who wouldn’t want to get in early on the cure for Cancer. Or the next Chipotle, Amazon, Google, etc. Seemingly unsuspecting investors start to put their hard earned money into the stock, buying it up in huge volumes and quantity. This effectively sends the price of the stock, higher and higher. After all, most people can afford A LOT of shares of a stock that cost 5 cents or a dime.
Stage #4 The Dump
The orchestrators are now ready to unload the shares they began accumulating at the beginning of this penny stock ‘pump and dump’ scheme. They are now selling to the folks that are coming late to this party. And as they unload the shares, the stock price starts to decline.
It goes from all-time highs, back to the lows (where the pump started). Leaving unsuspecting investors out of a lot of money.
Being a victim of a penny stock 'pump and dump' scheme can be devastating and can lead to huge financial losses. Make sure to watch out for them and avoid at all costs.
IMPORTANT THINGS TO PAY ATTENTION TO WHEN TRADING PENNY STOCKS
At this point, you should know a great deal about penny stock trading and the risks associated with trading penny stocks. I won't discourage you from trading penny stocks but if you're going to trade them, find some of my top tips!
TRADING PENNY STOCKS-PENNY STOCK TIPS
TIP #1: Develop a trading system
TIP #2: Stop over trading (only trade the best set-ups)
TIP #3: Have a plan for each trade
TIP #4: Avoid Huge Losses
TIP #5: Be patient with your winners
TIP #6: Find a trading coach or a mentor
TIP #7: Manage risk
TIP #8: Record your trades (trading journal)
TIP #9: Do your homework
TIP #10: Avoid penny stocks with no liquidity.
TRADING PENNY STOCKS FOR BEGINNERS- A GUIDE FOR SWING TRADERS AND DAY TRADERS (SUMMARY)
Penny stocks are securities that are priced at $5 and under. Most new traders begin their journey in the stock market by investing in penny stocks. While you can make money trading these low-priced investments; they are risky and should be traded with the most extreme level of caution.
If you’re going to trade penny stocks, it’s best to find an ideal broker you’re comfortable with. In addition; at some point, you’re going to want to decide if you prefer fundamental analysis, technical analysis or both. It’s also important to figure out if you want to day trade penny stocks or swing trade them. There’s no one size fits all, it’s highly dependent on your account, objective and comfort level in the stock market.
You can find stocks to trade by utilizing a host of free services (Yahoo!, Benzinga, Finviz, Google, etc) or you can subscribe to our newsletter subscription service that do the heavy lifting for you.
Remember that penny stocks are extremely risky, and you want to avoid things such as, ‘pump and dump’ schemes, along with mistakes new traders tend to make (avoid them at all cost).
Most importantly; follow our suggested tips for penny stock trading and never stop learning the stock market.
Thanks for making it to the end of this article. Comment below and tell me what your experience has been trading penny stocks.
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