How to Get Started in Trading Penny Stocks for Beginners

Looking for how to get started in penny stocks? It’s important to learn about important topics such as float, choosing the right broker, pdt rule, proper risk management, and position sizing first before jumping right into trading. Many new traders get excited by the lure of how inexpensive penny stocks are. Then many get caught off guard when they get started because they weren’t aware of all the important aspects on how to trade them. Watch our video on how to get started in penny stocks.

How to Get Started in Penny Stocks

  • Steps on how to get started in penny stocks:
  • Choose the right broker. TD Ameritrade, Interactive Brokers: good for basic trading
  • SpeedTrader, LightSpeed, Centerpoint: great for order execution and shorting
  • CMEG & UStockTrade: great brokers for avoiding pdt rule
  • Understand the differences between low float and high float stocks
  • Know the difference between OTC/Pink Sheets vs Nasdaq small caps
  • Have a good stock scanner
  • Learn how to read candlestick patterns, draw support and resistance levels and trend lines
  • Make sure to have high speed internet connection
  • Hot keys are the key to getting in and out of trades quickly

When you’re learning how to get started in penny stocks knowing the risks and rewards is important. Penny stocks are low priced and typically traded outside of major market exchanges. They are high risk because of lack of liquidity as well as high bid ask spreads. Watch our video on how to get started in penny stocks. 

Previously penny stocks were traded under a dollar per share. The SEC changed it to any stock that trades under $5. Penny stocks typically trade OTC (over the counter) or are pink slip stocks.

Some stocks that are under $5 do trade on the major exchanges because of the market cap but typically that isn’t the case. A typical penny stock company is small with highly speculative shares because they’re have fewer filing and regularity standards; something to know when learning how to get started in penny stocks.

Basics on How to Get Started in Penny Stocks

How to Get Started in Penny Stocks

When you’re learning how to get started in penny stocks be aware that you need a high risk tolerance. Penny stocks have the potential to be volatile. It’s high risk high reward. Taking precautions against the risk is smart.

For example, having a predetermined stop loss gives you a safe guard from losing too much. You can lose your entire investment on a penny stock. Implementing that stop loss keeps you loss at a minimum.

People view penny stocks as a vehicle to get rich quick. Yes they can have explosive moves, however, you need to be realistic with your expectations.

Penny stocks are typically small but growing companies with limited cash flow. In other words, they’re high risk with low volume.

You need the volatility volume brings. Volatility means the price can change dramatically quickly. This can be good and bad because it could go against you. Hence why a stop loss is important when learning how to get started in penny stocks (read our stock market training page).

Fascination

How to Get Started in Penny Stocks

There’s no denying people have a fascination with small cap stocks. In fact, everyone expects to buy a stock for pennies and sell it for dollars. This rarely happens. If that happens to you, you’re very lucky.

enny stocks are young companies, small banks, declining companies and legally trading shells of bankrupt companies. That’s why their shares seem like such a deal and why you need to be careful. They don’t have the same regulations as the larger shares.

You need to be aware of this when you’re learning how to get started in penny stocks. Open a paper trading account and practice. You can practice and familiarize yourself with penny stocks and how they trade.

Thinkorswim has a great paper trading system. Practice at least 6 months making hundreds of trades. Take our Thinkorswim tutorial to learn how to set up your practice account.

Can You Make Money in Penny Stocks?

  • Yes, you can make money with penny stocks. Here’s steps how:
  • Learn candlestick patterns and how price action works
  • Have 1:5 risk reward ratio (ex. risk $0.10 for the potential to make $0.50)
  • Scan the pre-market for gapping stocks that have a news catalyst
  • Look for stocks that have at least 100,000+ pre-market volume
  • Create a watch list of 3-5 penny stocks to watch at open
  • Map out premarket support and resistance levels
  • At open, watch for stocks that get volume and are setting up for potential breakouts over premarket highs
  • Look for bull flags and ascending triangle patterns
  • If the setup looks good, take a potential trade and have tight risk management

Be Aware of the Pump and Dump

How to Get Started in Penny Stocks

One thing you’ll quickly find out as you learn how to get started in penny stocks is the pump and dump. This is the bread and butter of penny stocks trading. Be wary of anyone who has a hot tip.

If a person is talking a stock up, they’re trying to get the price higher. So it’s most likely due for a correction. When you hear that a stock is “going to the moon” do your research.

That’s not to say you can’t buy the dip and sell the rip but do your due diligence. Never buy a stock based on someone’s recommendation.

That’s a great way to blow up your account. Shorting is a good way to make money when penny stocks go down.

Charts Don’t Lie

The good news when you’re learning how to get started in penny stocks is that the charts don’t lie. No matter what someone is telling you, the charts will tell you the truth.

Technical analysis patterns are everything. If a stock is “going to the moon” look for support and resistance. If it’s close to resistance than stay away!

Technical analysis gives you answers. You don’t have to guess. Making an educated trade is so important. Read about our trading service to learn more about what we offer.

How Much Money Do You Need to Invest in Penny Stocks?

How much money do you need to invest in penny stocks? You can get started with at least $2500-$5,000, however, if you don’t have at least $25,000 you will get the pdt rule, which limits you to 3 day trades only within 5 calendar days. Brokers like CMEG and UStockTrade help you avoid pattern the day trade rule and allow you to have smaller accounts.

Can You Learn How to Get Started in Penny Stocks?

Don’t be scared as you’re learning how to get started in penny stocks. Get a good plan and stick to it. Practice as well as look at the charts when someone has a hot tip. If you follow those methods, you can’t do wrong.

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