How to Research Penny Stocks

How to Research Penny Stocks

8 min read

Knowing how to research penny stocks will help to give you a traders edge. Fundamental analysis and technical analysis are both key. Using a good day trading scanner will help you to find high volatility, low float stocks, with breaking news that you could trade momentum gap and go plays. Fundamental research on a companies financials such as EPS, market cap, and ROE are also very helpful to determine if you’re going to hold a position long term.

Here is how to research and find penny stocks to trade:
  1. Have a good penny stock scanner such as Trade Ideas
  2. Scan pre-market for gapping stocks
  3. Look for a news catalysts
  4. Take a look at float to see how volatile price action is
  5. Also, make sure to be aware of short float
  6. Fundamental analysis can be good but most penny stocks have poor financials
  7. Make sure they are traded on a major exchange
  8. Be careful of OTC or pink sheet companies
  9. Have scanner running during market hours to hunt for momentum plays

Knowing how to research penny stocks is the key to making winning picks. Penny stocks are stocks under a dollar but can go up to $5. The low share price is attractive to investors especially if you don’t have a lot of money to trade in the stock market.
Buying a 10,000 shares of a stock at $0.08 is more appealing then buying a couple shares of a higher priced company. Penny stock investors tend to buy these small priced stocks hoping they’ll rise 10 times that amount.

Penny stocks can in fact make you a lot of money. Before you start trading these, you need to understand they are risky business.

Penny stock trading is mostly traders talking their position. If a trader needs to fluff up a stock price they’ll go around saying what a hot stock it is.

Where to Find Penny Stocks


Cheap shares may seem more affordable to traders. You’re getting more bang for you buck when you can buy more shares at a cheap price. This is a the biggest mistake a trader can make. Hence the need to know how to research penny stocks.

Sure it seems reasonable at first glance. Buying 10,000 at 10 cents is better than 100 shares at $100 right? You’re getting more with 10,000 shares. You need to look at how many shares are available. How large is the float? Is it heavily diluted? What’s the average volume like?

This is a factor most penny stock traders don’t consider. There are lots of factors that make a stock “technically speaking” a good stock to trade. It’s not always a situation where the more shares you buy, the better the trade will be.

You Have the Advantage

When you know how to research penny stocks you have an advantage over many other traders in the same sector. Lots of penny stock traders do zero research.

They just buy on emotions. Or on a tip or recommendation. This doesn’t usually end well, though in some cases it does work out. Luck is a thing right?

Penny stock companies are small businesses in need of cash flow. Or they’re bankrupt companies using legal shells to trade.

Small banks can also fall under this category. This doesn’t mean it’s bad to trade these companies. In fact they can be quite lucrative.

A small biotech company can be a great trade. Especially when the sector is hot. If that company gets FDA approval it could soar.

Whereas a a no name, not popular marijuana company may be a pump and dump kind of company that just trades with the momentum of good, real cannabis stock companies.

Some of the hot companies in this sector are $ACB $CRON $CGC $TLRY $CARA $GWPH and more. We aren’t suggesting you buy this companies, only that you look at the charts, and the fundamentals behind each stock and think about it.

You have to watch the charts. Draw your trend lines. Check out the RSI. There are lots of indicators and studies you should look at before you take a trade.

Learn How to Trade the Pump and Dump

As you learn how to research penny stocks be able to spot the pump and dump. Pump and dump stocks have a pattern.

They usually have 2 or 3 really green days before they crash. Rinse and repeat. They usually make head and shoulders patterns, megaphones, or rising wedges.

The pump and dump world of stocks is what makes trading penny stocks risky. Do you know when to get in and get out? Know how to safely trade it so you’re not stuck taking a loss.

Penny stocks can lose their liquidity (volume) and then they don’t move very fast for a long time. They could grind sideways, sideways and lower, sideways and slightly higher, for months and even years.

Beware of people who are telling you a stock is going to soar. They bought in at 5 cents and now it’s 7 cents. They’re telling everyone it’s about to take off and you need to get in before it hits a dollar. If they cannot show you on a chart (we can) then they are full of it.

You can definitely get into that stock if you want to take them at their word. We always say, trust but verify. Do your own due diligence first.

But researching what the technicals tell you will keep you form making a bad trade. We teach how to trade real-time in our trading rooms.

Fundamental Analysis

As you learn how to research penny stocks look at fundamental analysis. Fundamental analysis looks at the financials of a company. 

Chances are if a stock had a dramatic spike in price, it’s going to correct itself. We like to check investors business daily, earnings whisper, or benzinga for the 411 on fundamentals.

We aren’t huge fundamental traders and prefer technicals, but knowing the fundamentals helps.

You can use Yahoo Finance or a company like that to look at the financials too. If you come across a hot penny stock list, most likely they’re pump and pump schemes.

If a penny stock can be found on a main stream site they’re usually more legitimate, they’ll also have more eyes on them. Eventually, traders will take profits and the price will go down.

If the fundamentals are sound, you can use this to dip buy the stock at the right time.

Technical Analysis

Use technical analysis as you learn how to research penny stocks. What do the charts tell you? The chart is going to tell you if it’s a pump and dump. Technical analysis tells you if it’s due for a price correction.

Penny stock trading is typically done intraday. Finding a good day trading strategy coupled with good technical analysis will help make the best trades.

Use things like the moving averages and VWAP for support and resistance and entries and exits. You can use what you learn on our live streams to help you trade.

We typically will give you a play by play on what we are looking at, whats expected, what we are looking for and the WHY things happen the way they do.

The bottom line, know the trend and direction of a stock before you place your order. Make sure you learn how to short for when the market is bearish.

How to Research Sectors

Have you noticed the price of bitcoin? When bitcoin moves, bitcoin related stocks and blockchain stocks will run.

If you get caught up in the hype, you might buy a blockchain penny stock that pumps and dumps. Look into the background on the company first.

This sector is ripe with stock pumpers and promoters. Bitcoin is heavily speculative so be cautious with it in general.

Bottom Line

You have learned how to research penny stocks but no matter how much research you do, ultimately they are still a riskier area of the stock market then say, blue chip stocks.

Or even 401ks and mutual funds. A balanced portfolio is a must. A savings account is a must. Set yourself up for success. Never invest more money than you’re willing to lose and practice good risk management!

If you need more help, take our day trading course.

Frequently Asked Questions

Can penny stock make you rich? Yes they can, however, you have to be extremely disciplined with your risk management. Try to have a 1:5 risk/reward ratio but a minimum of 1:2. Make sure to keep your losses small and remember to take your profits.

Here's how beginners buy penny stocks:

  • 1st step is to study and take a course
  • Learn both technical and fundamental analysis
  • Determine your trading style
  • Choose a broker
  • Learn candlestick patterns
  • Draw support and resistance levels
  • Volume is key for liquidity
  • Hot keys are important for order execution
  • Practice trading in a virtual account.
  • Don't mess with real money out of the gate

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