Watch our video on investing in penny stocks.
Is Investing in Penny Stocks Worth It & How to Invest?
- Investing in penny stocks is worth it, however, we suggest trading them.
- Here's how to invest or trade them:
- Choose a broker like Interactive Brokers, SpeedTrader, CMEG, or UStockTrade
- Be aware of pump and dumps
- Volume and price action is key
- Candlesticks are best trading indicator
- Most indicators are lagging
- Risk management is very important
- Watch them like a hawk and wait for the dump after the pump
- Practice paper trading first
Is investing in penny stocks something to consider? Is this a good strategy to use to grow your account? Penny stocks and investing aren't typically synonymous. You can invest in them. However, is it a good idea? Watch our video to find out.
There a few ways to trade penny stocks. Investing in penny stocks is just such a strategy. In order to safely invest in penny stocks, there are some things that you need to understand. As a result, you can make the right decision for you.
1. Basics of Investing in Penny Stocks
What does investing in penny stocks mean to you? That might be the most important question to answer before you do it.
What are penny stocks? They're stocks that trade $5 and under. Many penny stocks are pink slip or OTC. That means it's hard to find them on an exchange.
We can tell you right now that the safer penny stocks are ones that trade on the exchanges like the NASDAQ and S&P. They're still subject to manipulation.
However, it's much more regulated. OTC and pink slip penny stocks don't have any regulations.
Therefore, they're easily manipulated and full of pump and dumps. Do you want to invest in that?
If you're going to start investing in penny stocks, you need to make sure you understand the sector. And the risks. Check out our service to learn more about different penny stock trading styles.
2. What Is Investing?
If you're going to start investing in penny stocks, you need to define what investing means to you. Typically, investing means holding long term.
Investing in penny stocks would mean you're buying the stock to hold for years potentially. However, you want the stock to consistently profit for you.
Many times investors are investing in stocks that pay dividends. You're expecting to generate income. Dividends do that.
Can investing in penny stocks provide an income? The honest answer is probably not. Especially if you're looking for good long term gains.
The penny stock sector is highly manipulated. As a result, investing in penny stocks isn't going to turn a profit.
As harsh as that sounds, it's the truth. Check out our online trading courses to learn other ways to trade penny stocks.
How Do Beginners Invest in Penny Stocks?
- Beginners should trade penny stocks over invest in them
- Most penny stocks are pump and dumps
- Do your proper research
- Be aware that OTC/Pink Sheet stocks under $1 aren't well regulated
- Many small cap stocks have bad financials so be careful investing
- The key is to buy low and then sell high
- So, buy at support and sell at resistance
- Bull flags are the safest pattern to trade. Look for entries near MA support lines
- Practice paper trading
- Keep your losses small and let your winners run
1. Penny Stock Manipulation
The penny stock sector is one of the most manipulated sectors out there. As a result, you get stick investing in penny stocks even though you didn't want to.
How many times have you heard that a penny stock is going to the moon? Or that they're getting FDA approval and it's about to take off. Get in on the ground floor before it shoots to the moon!
If it sounds too good to be true, it usually is. However, people get sucked into the trade because it's made to sound so amazing (find out when to use a stock loss vs stop limit order).
Then, they find themselves stuck and unable to get out. Unfortunately, this happens to new traders looking to grow their accounts.
Pumper's aren't going to tell you they're either being paid to pump a stock or they themselves are stuck. In fact, that's the reality of investing in penny stocks.
Did you know that the majority of people pumping penny stocks are paid to do so. They don't even trade them. Instead they're paid to sell them to you.
Another situation is the that they were suckered into a trade then left bag holding. As a result, they need others to come in and pump up the stock so they can get out without taking a big loss.
Try our live trading room free for 14 days.
2. Day Trading or Investing in Penny Stocks?
Instead of investing in penny stocks, day trading them is the best way to trade the sector. That way you can take advantage of the pump and dump.
You don't have to be afraid of penny stocks if you know how to trade them. In fact, finding good penny stocks to trade can help to grow your account (find out when to implement a stock loss vs stop limit order).
Isn't that the goal for every trader? However, we seem forget what we know when we get into the penny stock sector. It's almost like it's mysterious and we forget what we've learned.
Trading risk management in absolutely necessary whether investing in penny stocks or day trading them. Stop losses and support and resistance are key.
It doesn't matter if you're investing in penny stocks, day trading them or swing trading penny stocks, you need proper risk management.
Check out our live trading rooms if you want to see day trading penny stocks in action.
How Long Should You Hold Onto Penny Stocks?
- Knowing how long you should hold onto penny stocks is something you need to determine before entering a trade. We recommend day trading them. Look at support and resistance levels on 1 minute and 5 minute intraday charts. Take your entries at support levels then take your profits at resistance levels or when you see reversal candles like doji's or spinning tops.
1. A Penny Stocks Watch List
Investing in penny stocks isn't always the best idea. However, swing trading them is a possibility. Swing trading means you're holding them at least over night.
If you're going to be trading penny stocks at all, day trading or swing trading, you need a safe penny stocks list. A trustworthy list is one you know isn't pumping.
If they can't tell you based on a chart why it'd be a good trade, stay away from it. If they can't tell you based on a chart, why you can't do it, then you don't want to be trading it.
These are penny stocks that trade on major exchanges. Therefore, they do have regulations they have to follow. As a result, they're a little safer to trade.
Check out our watch list each night and practice trading it. You may find one or two that make a good swing trade; which is better than investing in penny stocks.
If you want real time alerts for larger stocks, then check out our stocks alerts page.
2. What Makes Investing in Penny Stocks Unsafe?
Penny stocks are typically bankrupt companies or legal shells of bankrupt companies. Especially if they're trading OTC.
That means they could close their doors and your investment is gone. Hence the riskiness of investing in penny stocks.
Think about hearing someone pumping a stock to you. It's the next big thing! If you buy in now, you'll be a multimillionaire in less than a year. Just watch! It's about to take off!
Who doesn't want that to happen? The dangerous thing is that these companies can and do get legitimate people to pump their stocks. You see someone from Berkshire Hathaway promoting it.
It must be safe then. As a result, you go out and buy a large share in it. After all, it's about to take off and you're going to be rich. You won't have to trade or work again.
Next thing you know, it tanks and stays there. As a result, you're stuck investing in penny stocks without any return. Which isn't the goal of investing right?
3. Can You Swing Trade Penny Stocks?
Since investing in penny stocks isn't the best way to trade them, how about swing trading? When you're swing trading, you're holding at least overnight up to a few weeks.
Therefore, you're not trying to make a long term profits. While you can do that with penny stocks, you need to make sure they're going to move.
Many times people get stuck in trades because the bid ask spread is too large and/or volume is gone. These are still things to think about if you swing trade.
As a result, you have to look at the profit potential. Where are support and resistance? What are the patterns? Is there enough profit potential?
How about the history of the chart? Does it show pump and dumps? What about volume? These are all questions you must ask yourself with penny stock trading.
What Percentage of Penny Stocks Fail?
- There isn't an exact percentage of penny stocks that fail but you can safely assume that most will fail. Penny stocks are typically pump and dumps that run temporarily for a few days off of a news catalyst then end up dumping. If you don't get in at support before the pump then you can be left holding the bag at the tops when they fail.
1. Fundamental Analysis: Investing in Penny Stocks
If you decide that you really want to get into investing in penny stocks, then you need to look at fundamental analysis. How does it differ than technical analysis?
Fundamental analysis measures the value of a stock by looking at it's economic and financial factors. In other words, you're going to look at anything that can affect the value of a stock.
The end goal is to see if a stock is over or undervalued. You don't want to invest in a penny stock company that's already overvalued. Especially if it's already pennies on the dollar.
How's the management? Bad management can kill a company.Who's the CEO? Listen to their conference calls. Is the management unloading their shares?
Is their business model sustainable? This is something to consider for companies like biotech. Can they hang around long term?
Do they have a competitive advantage in the field they're in? Is their product better than other companies in the field?
If you're investing in penny stocks, these are the questions you have to ask yourself. You definitely don't want to be investing if these questions don't have good answers.
2. Bottom Line
Investing in penny stocks isn't a safe way to trade them. As a result, day trading them is typically the safest. That way you can profit off the pump before it dumps.
It's really important to use proper risk management with penny stocks. You need to protect yourself and your brokerage account.