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GPSM | Will Bell | Dec. 7th, 2024
The Penny Stock Investor's Handbook: Everything You Need To Know To Start Trading
Learning how to day trade penny stocks has grown in popularity as more people become interested, but what are penny stocks and why are they so popular?
How are Penny Stocks Defined?
According to the Securities and Exchange Commission (SEC), a penny stock is a security that trades for less than $5.00 a share. The majority of these enterprises are young, have a modest market capitalization, and lack a track record of performance, making them speculative bets for traders and investors.
What are penny stocks, then?
To begin...
They are inexpensive, which means you do not require a great amount of capital to open a large position.
Penny stocks frequently experience massive runs of 100% or more in a single day!
...which explains why they have grown in popularity.
However, due to the volatility associated with penny stocks, it is just as simple to lose all of your money, or even more if you trade on leverage.
That is why, before risking any of your hard-earned money, it is critical to understand how to trade penny stocks and what to watch for!
Take a look at our penny stock watch list.
How I Began Trading Penny Stocks
I was exposed to penny stock trading by a friend who began trading stocks for a penny several years after I began trading large-cap equities out of high school.
This would have been approximately 2005-6ish, and trading online with E-Trade was just beginning to take off at the time.
I was always aware of the possibility of profiting in the stock market through penny stocks, but they lacked the allure of Sun Microsystems at the time.
Not to mention that Maria Bartiromo who was the CNBC Super Babe of the 90's never mentioned penny stocks.
I choose to open a separate Zecco brokerage account because at that time they were known as the best brokerage for getting sub-penny shares.
Shares of stocks that traded from $0.0001 to $0.01.
I Lost a Lot Of Money In The Early Years Because I Was Investing In The Incorrect Stocks In The Hope Of Achieving High Percentage Gains Fast.
I got knocked out... a lot.
To grow a little sum of money ($500.00), we must trade small-cap equities that have the potential to double or triple in less than a week!
That occurs infrequently with large firms such as Facebook or NFLX, but frequently with penny stocks!
Penny Stocks on the OTC Market vs. Penny Stocks on the NYSE/NASDAQ
No doubt many of you have seen Jordan Belfort's film Wolf of Wall Street and by this time everyone has.
These guys were dealing penny stocks on the Pink Sheets in the film.
These penny stocks are traded over the counter (OTC), which means they are not registered on the NYSE or NASDAQ and are not subject to the stringent financial requirements imposed by the main exchanges.
To be listed on the top national exchanges, you must be completely transparent about your financials and maintain a price per share of more than $1.00.
We Enjoy Trading OTC Penny Stocks, But You Should Only Do So If You Understand The Risks.
Companies Who Are Unable To Produce Adequate Financial Documents, Unable To Maintain Their Stock Above $1.00 Per Share, Or Are In The Process Of Filing For Bankruptcy... Will Trade On The OTC Markets.
If you don't like risk, you may wish to avoid trading penny stocks over the counter due to the lack of liquidity and a lack of regulation in the OTC markets.
They are significantly more prone to manipulation folks, which makes them risky to trade, but dang if they don't provide a very high risk-reward ratio.
Penny stocks that are publicly traded, or stocks that trade on an exchange such as the NYSE or NASDAQ, are excellent for concentrating your attention.
They are capable of making substantial intraday swings and are inexpensive enough to trade large positions.
Penny Stocks' Four Tiers: Redefining "Penny Stocks"
Stocks trading below $1.00 were almost always small companies attempting to establish a foothold in the market, making them highly speculative investments for traders or investors.
In today's world, stocks valued between $1 and $10 continue to be some of the most high-risk/ high-reward investments available.
This is especially true for small businesses in the biotechnology, information technology, and financial technology industries.
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These stocks can release news overnight that results in a 50% decline to the downside or a 100%+ gains to the upside.
Anyone investing in or day trading in these types of assets must be prepared to suffer a complete loss or deal with greed when the stock goes supernova.
For reference's sake, if you took $500, and multiplied it into more than $10,000, as one of our members, Odale Mitchell, did you have to understand this isn't the norm and beating the market forces of greed takes work.
We generally traded equities in the $1.00 - $5.00 range.
These stocks all meet the exchanges' minimum listing standards, but we trade stocks that are sub-zero $0.009 - $0.01 a share too.
If you're investing your hard-earned money in a stock, you don't want to have the feeling that the firm would vanish overnight so you have to prepare in these types of risk/reward situations.
Tiers Of Penny Stock
Tier 1 Penny Stocks:
These are the penny stocks on which we concentrate our efforts.
They are traded on a large market, such as the NYSE or NASDAQ, and are typically valued below $5.00 per share
though they can be slightly higher.
Tier 1 penny stocks remain speculative but are less susceptible to manipulation because to the exchanges'
requirement that they disclose financial information and are held to a higher standard than OTC penny stocks.
Tier 2 Penny Stocks:
In my opinion, traditional penny stocks are those valued between $0.01 and $0.99 are in the Tier 2 bracket.
They are not less than one cent (in case you were unaware, equities can trade at fractions of a penny). It is not uncommon to find a stock with a price range of $0.01 to $0.99 still listed on the NYSE or NASDAQ.
These firms often receive a notice (which is made public) stating that they must comply with the listing standards
in order to have their stock trade over $1.00 within a specified time period.
If they succeed, the stock will remain listed; if they fail, it will be delisted and transferred to the OTC market. It is
critical to note, however, that equities trading above $1.00 will never have a spread less than a penny.
That is, the stock will never trade at 1.01 x 1.02 or at 1.05 x 1.06.
When a stock trades LOWER THAN $1.00, it trades at fractions of a penny.
Tier 3 Penny Stocks:
Sub-penny stocks are stocks with a market capitalization of less than $0.01 per share.
Thus, this begins at $.001 to $0.01 in pricing.
As these types will not be NYSE or NASDAQ equities listed, I don't avoid trading them because there is a very high-risk/high-reward ratio with these trades. The winners are amazing. These are remarkable since the companies are insufficiently robust to have their stock valued at a cent per share.
Tier 4 Penny Stocks:
Trip Zero Stocks (Priced between $0.0001 and $0.0009). Trip Zero Stocks are denominated in three digits. These are equities with a price range of.0001 to.0009 per share.
As you may expect, these stocks are frequently manipulated. Each increment in the stock's price represents a 100% increase over the entry price of.0001.
Many of the "hot penny stock" tips focus on sub-cent or trip-zero stocks, which primarily benefit the original purchasers.
If someone purchases 100 million shares at $0.0001 ($10,000) and the stock rise to.0010, they will sell with a profit of $100,000.
Many of the stock promotion newsletters are distributed by individuals who have amassed substantial stakes in these tiny stocks.
Many individuals believe that making a fortune through penny stock day trading or swing trading is the ultimate rags to riches story.
By trading the market's cheapest stocks, you can invest little amounts of money and earn enormous profits.
However, how difficult is it to earn a living day trading penny stocks? It's a test of the trader's risk awareness and skill set really.
The prospect of quick profits attracts many to the penny stock market, where many investors lose their shirts.
At the end of the day, just 17% of market participants will be profitable. The remainder are handing their money over to more savvy dealers. After months of trial and error with penny stocks, I discovered that a few stocks make significant changes each day.
The goal is to learn to identify those stock traits BEFORE they make a significant move. This became the foundation for the momentum trading approach I am currently using.
This is how I approach day trading penny stocks and small-cap stocks.
They meet the following criteria for trading: a news catalyst, a float of less than 90m, and a strong relative volume.
How To Invest In The Best Penny Stocks
To trade penny stocks successfully, the first step is to invest in stocks that have the highest potential for a big run.
However, how can we determine which ones will be the game-changers?
This is where our Penny Stock Signals enter the picture.
Our trading newsletter Golden Penny Stock Millionaires monitors the markets every day and alerts you to the best trades via a watchlist that suits my unique criteria to select a stock.
This gives you an advantage because I only want to trade stocks that I believe have the potential for constant runs. (See Testimonials)
Golden Penny Stock Millionaires and Next Big-Cap Alerts are my two primary Stock Signal Alerts Newsletters.
They find stocks that are moving a lot of money on a high volume, and we send our members alerts. Golden Penny Stock Millionaires Is ideal for scanning small caps.
It targets penny stock equities that look to be rising higher on strong volume and remain inside our trade criteria.
If I am not watching any small-cap stocks in the premarket our watch list alerts will be our company's small-cap signal system.
Golden Penny Stock Millionaires will display all stocks that fit my volume and price criteria but are also gapping up in the premarket, indicating that they are usually triggered by some sort of news ideally.
I may then sort the trades according to the volume of the stock or the percentage of the stock that is gapping up before the alerts go to you guys in the premarket or the day before.
I Utilize 3 Distinct Metrics To Identify Penny Stocks With The Most Potential For a Massive Run.
Metric 1: Breaking News
— Initially, I seek for stocks that are gapping up on the news, such as FDA approval or earnings, but we want to avoid stocks that are being bought out, as they typically do not trade away from their purchase price.
Metric 2: Float
- Ideally, the float should be less than 100 million shares, but less than 50 million is preferable.
This is because when a stock has a small number of shares available for trading and there is a high level of buying interest, it might rapidly increase in price, which is just what we are looking for.
Metric 3: High Relative Volume
- I prefer to see a stock that is active in the premarket with substantial volume.
Typically, news-driven equities gap up in the premarket on really high volume, which tells me right away that this company will have plenty of liquidity for me to trade with size.
Once I've created a watchlist of the best-looking stocks based on the aforementioned criteria, I'll wait for the market to open if I'm personally trading or if it's a signal alert we will send the watchlist to our subscribers.
Are You a Day Trader or An Investor In Penny Stocks?
Penny stocks, in my view, are so super volatile and can be super unpredictable.
They are susceptible to market manipulation and investing in them requires more skill than ordinary securities.
To survive, you must have a short-term perspective and be one of the first traders to enter and exit with a profit like a cold shower.
Bear in mind that a penny stock firm can have a poor balance sheet and poor fundamentals and then skyrocket 500% on breaking news.
As a result, shorting penny stocks in the expectation that the companies will fail is exceedingly dangerous.
Fundamentals will eventually matter, but most investors are incapable of holding a position down 500 percent.
I like to Swing Trade penny stocks.
This means I adhere to a few very strict guidelines regarding stock selection and trading. Swing Trading Penny Stocks is second nature to me at this point.
At this time, I can earn a 300% ROI in three months without breaking a sweat, but keep in mind that it took me years to get here.
One of my favorite aspects of my job is assisting new traders, as I understand what it's like to be totally new to the market! Working with novice traders is extremely enjoyable for me because I remember those days of what it was like to be a novice trader.
I believe myself to be no different from rookie traders.
The only difference is that I'm a little further along the road to success, and can look back on where you are now, and see what it took to get where I am now.
Five Tips To Help You Survive As A Penny Stock Day Trader
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1. Understand the Risks Associated with OTC/Pink Sheet Penny Stocks
Companies trading on the OTC (over the counter) market are subject to less regulations than those listed on the NASDAQ or NYSE. As a result, equities traded on the over-the-counter market are extremely vulnerable to manipulation and fraud.
Penny stocks that are less risky but less lucrative trade on the NYSE or NASDAQ. These businesses are subject to greater compliance standards.
2. Avoid Falling for Promotional Pumps!
Numerous OTC Penny Stocks are pushed at some point. These pitches frequently include statements such as "this stock will be the next Apple."
The reality is that the next Apple is unlikely to emerge from the realm of penny stocks like the Facebook IPO. It seems more likely that the next major tech business will begin as a massive company that goes public at a price considerably above the penny stock range and then continues to grow.
When you purchase penny stocks in the belief that they will become the next Apple, you are investing in one of the most speculative financial instruments available my friend.
3. Trade Only Penny Stocks with High Volume
It is critical to avoid illiquid penny stocks. The majority of penny stocks trade at a daily volume of a few thousand shares.
However, when a penny stock experiences significant news, it may frequently trade at 40-50x relative volume, equating to 5 to 10 million shares of volume on a large day.
These are the days when I'm going to trade penny stocks. The good news is that practically every day, a penny stock is experiencing a once-a-year occurrence!
As a result, there is nearly always something to consider as a trader.
4. See Green Take It/ Adopt A Cash-On-Hands Approach
Once a penny stock meets my criteria for trading (news, volume, and OTC/NYSE/NASDAQ listing), I seek for one of my Go-To setups.
There are several types of momentum trades, including gap and go and reversal trades. A critical criterion is that I should never trade these stocks excessively.
As a result, I take only the most obvious setups. I purchase in an area where I anticipate lots of other traders will also herd together.
These entries are based on patterns of support and resistance. Once profitable, I sell half of my investment and adjust my stop loss to break even. By immediately collecting profit and adjusting stops, I secure at the very least minor winners with more profit to keep going.
Occasionally, I'll enter a penny stock and make a large profit, but as a trader, I'm looking for numerous modest profits.
5. Concentrate On Bringing A Weekly Paycheck Home From The Market
It's critical that I'm not looking to hit home runs or earn tens to twenty thousand dollars in a single trade.
My primary objective is to trade penny stocks practically daily, with a daily goal of $250-$1,500 if I can.
This can equate to annual profits of between $100,000 and $200,000 depending on your trade management, patience, and mastery over market forces.
Numerous minor base hits accumulate over weeks, months, and years. My primary objective is to earn a living by trading penny stocks, rather than investing in penny stocks.
Interested in Learning More?
Numerous novice traders begin their trading careers with penny stocks.
We strongly recommend traders to conduct due diligence on penny stocks and in fact all securities, to begin with, those valued between $1 and $5 a share.
If you trade under $1 or stocks between $0.0001 and $1 we strongly recommend using smaller amounts of capital until you get used to the speed of profits and losses because they can come quickly too.
Penny Stocks are equities with the ability to move by 20%-30% intraday yet retain the security of being listed on the NYSE or NASDAQ.
As a result, they are more popular among traders and are frequently seen as safer trading and investment vehicles by skilled trades.
As you are probably aware, I am an active trader of stocks priced between $0.009 and $5.00, with the occasional exception of equities priced as high as $200.
I trade stocks that publish breaking news like results, contracts, FDA approvals, and other public relations announcements.
I also seek the stock that is experiencing a once-a-year event, as this is the stock that everyday traders will be monitoring.
To discover more about penny stock trading and how to get started, click here!
Final Remarks
Penny stock trading is not for everyone... but is it right for you?
It necessitates a certain level of risk tolerance, as well as the capacity to react rapidly in all market environments.
However, if you believe you possess the skills necessary to trade penny stocks you must educate yourself on how to trade them.
Money management practices are important in order to prevent losing all of your hard-earned capital.
I'd also recommend beginning with paper trading through our penny stock Trading Newsletter Golden Penny Stock Millionaires.
This allows you to practice trading in a real-world environment without risking any real money. Golden Penny Stock Millionaires is right for you.
Ready to put in the work to successfully trade penny stocks?
