How to Research Penny Stocks

How to Research Penny Stocks to Trade

9 min read

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

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 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 the scanner running during market hours to hunt for momentum plays

Basics on How to Research Penny Stocks

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

Penny stocks can 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 about their position. If a trader needs to fluff up a stock price, they’ll say what a hot stock it is.

Where to Find Penny Stocks

Bang for Your Buck

Cheap shares may seem more affordable to traders. You’re getting more bang for your buck when you can buy more shares cheaply. This is the biggest mistake a trader can make. Hence, there is a 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. You’re getting more with 10,000 shares. It would be best if you looked 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. Many factors 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 buy on emotions. Or on a tip or recommendation. This doesn’t usually end well, though it does sometimes work out. Luck is a thing.

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. 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.

A no-name, not-popular marijuana company may be a pump-and-dump kind of company that 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 company; we only suggest 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.

COURSE
Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading
INCLUDED

How to Trade the Pump and Dump

You can spot the pump and dump as you learn how to research penny stocks. Pump and dump stocks have a pattern.

They usually have 2 or 3 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 trade it so you’re not taking a loss safely.

Penny stocks can lose their liquidity (volume) and then not move quickly 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 must 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 get into that stock if you want to take them at their word. We always say trust but verify. Do your due diligence first.

But researching what the technicals tell you will keep you from making a bad trade. We teach how to trade in 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 has a dramatic price spike, it will 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 also use Yahoo Finance or a company like that to look at the financials. 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 mainstream 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 will 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. A good day trading strategy and technical analysis will help make the best trades.

Use the moving averages and VWAP for support, resistance, 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, what’s expected, what we are looking for, and the WHY things happen the way they do.

The bottom line is to know a stock’s trend and direction before placing your order. Make sure you learn how to shoot when the market is bearish.

Final Thoughts: How to Research Penny Stocks

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 of the company first. This sector is ripe with stock pumpers and promoters. Bitcoin is heavily speculative, so be cautious with it in general.

You have learned how to research penny stocks, but no matter how much research you do, they are still a riskier area of the stock market than 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 must be extremely disciplined with your risk management. Try to have a 1:5 risk/reward ratio but a minimum of 1:2. Remember to keep your losses small and 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 to liquidity
  • Hotkeys 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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