Author: Sejal   Views: 1350   Updated: 10-11-2021

Though it’s true that high risks are associated with penny stocks, there is also a path to profits. Investors who have learned the game of penny stocks and know how to make money with it can make quick profits trading penny stocks.

Now, the question is whether you can make money with it or not also? The answer is ‘YES’. You just have to keep in mind that normal stock trading and penny stock trading are both different. It’s very important to know all the aspects and facts about penny stocks before you start buying them.

What are Penny Stocks?

In the stock trading world, investors use various names for penny stocks such as small caps, microcaps, stock under $5 and many other terms. All of these names share one common thing and that is, penny stocks require a totally different approach to trading.

Facts on Penny Stocks

• Penny stocks are often traded on the OTC (Over the Counter) markets. They are not listed on the New York Stock Exchange and other exchanges.

• Younger companies with low cash reserves are usually tied with penny stocks.

• One can define penny stocks as the securities owned by private organizations.

• Very strict rules are made by the US Securities and Exchange Commission on penny stock trading.

• It’s very hard to price penny stocks accurately.

Pros and Cons of Penny Stocks

Pros

• Speed

• Turning small investments into a big amount

• Tomorrow’s big winners

Cons

• Low-quality companies

• Risky markets

• Different Stock Broker Regulations

• Shocking Valuations

• Volatility

• Lies and scams

Money-Making Penny Stock Trading Strategies

Pump-Dump

This strategy works on a simple funda, ‘buy cheap, talk up, sell high’; that is, buy penny stocks at a cheap price, convince and influence other people regarding its worthiness in respect to the price paid and then sell it at a high price. Although it’s one of the most difficult strategies of penny stock trading it’s also unethical and borderline illegal, you can make good money if have really good convincing power.

Luck

Luck is definitely not a strategy, but the idea of including it into penny stock trading strategies is to buy cheap penny stocks and then wait for your luck to change and then sell it. There are no certain possibilities of your luck to be in your favor as the tables can turn around any time. So, hope for the best.

Find a Turnaround Company

The only practical way of making money with penny stock trading is doing proper research, buying a discounted stock on the upswing and being patient, just like normal trading. Businesses don’t grow over the night, they take time to grow, to get back on their feet, to become stronger. These are the stocks that will make money if you do proper value analysis.

Tips for Picking a Winning Penny Stock

You can pick a winning penny stock even if the risk is very high and the liquidity of penny stocks is low. Just apply these tips to become the winner of penny stock trading:

• Aim for heavier trade volume penny stocks

The reliability of penny stocks depends on how much tradable they are. Always focus on a high trading volume penny stocks.

• Stick by the rule of ‘over .50 cents per share’

It is a thumb rule of trading where you have to trade in penny stocks with a price over 0.50 cents per share. Always remember that stocks that trade for less than that price are generally hypothetical and companies with no recognized track records of success fall in those stocks.

• Only buy money-making penny stocks

Do proper research before buying a penny stock. Check for the documented proof of profit that the company claims to make so the chances of losing money on purchased penny stock are less.

• Be patient

After knowing the right penny stock which has the capacity to offer potential gains, don’t jump and buy it instantly. Track that stock for a week and monitor its performance, its trade volume and then purchase it.

Penny Stocks Investment Rules

Despite the high risk, in the past few months, investors have got some fantastic returns from penny stocks. Keep these rules in mind if you also want to invest your money in this risky market segment:

• Avoid investing large amounts

Penny stock trading is a highly risky investment. It is advised to not invest larger amounts in these stocks. Invest only what you can afford to lose as the risk is very high and profit is quite less.

• Don’t believe any random person

You will get a lot of financial forums on the Internet where various advice and information are published regarding penny stocks. Do your research properly and don’t believe others especially when it comes to buying penny stocks. Firms generally try to sell the junk of their portfolio at a higher price and many times people get fooled by purchasing those stocks and suffer the loss.

• Try to invest only in 2-3 stocks

Avoid picking up a larger number of penny stocks and invest only in 2-3 stocks which you think are valuable and will make profits in future.

Things That Every Penny Stock Trader Must Know

There are some essential things which are needed to keep in mind in order to succeed with penny stock trading and investing.

• How to build your penny stock trading mindset

To succeed in penny stock trading, you should focus on watching the stock performance. Avoid investing a large amount of your trading account in a single penny stock.

Set your risk tolerance boundaries. Frame your own rules and follow them strictly.

In penny stock trading, chances of failure is very high. You might fail again and again. Despite avoiding failure, you have to learn from it. Eventually, you will notice that your failures are turning into success because you have learned from your mistakes.

• Common investment types in penny stock

Basically, we are surrounded by investments. They are all over the place. Some are legitimate, while others turn out to be scams.

• Important terms in penny stock trading which you should know

There are some terms in penny stock trading which you should be aware of. They are:

Moving Averages: Average price per share of a particular stock over a specific period of time.

Breakout: The stock broke through resistance and raised in price.

Resistance: A price for a stock that doesn’t appear to move outside of a particular price.

Breakdown: Stocks that get through resistance from the decline in cost.

Support: Similar to resistance. The only difference is that it is supporting a lower price.

• Functioning of wall street

Wall Street is the financial center of stock market trading and is actually a road in lower Manhattan. Successful trade firms operate on Wall Street.

Penny stocks are not traded on the New York Stock Exchange, they are traded on the OTC Bulletin and small-cap market.

• Key indicators

In order to determine the performance of your penny stock in the future, it is important to look at the key indicators. There are some positive as well as some negative key indicators which you have to look upon while trading penny stocks. Through these indicators, you get an idea about the kind of risk you are taking by investing in a particular penny stock.

Positive Indicators

The following are the positive indicators which you should look upon:

• Positive industry news

• New partnerships

• Positive earnings

• New Contracts

• Increased trade volume

• Positive financing

Negative Indicators

You should also look at these negative indicators. Negative indicators suggest that you should avoid a stock or short-move it:

• Poor industry news

• Reduced trade volume

• Financing anchored through distress

• Bits of gossip about antagonism from inside the organization

• Key penny stock chart patterns

A better trader knows how to read the chart patterns. Chart patterns also tell us the stock behavior in specific market conditions.

Common chart types

• Bar

• Area

• Line

• Candlestick

Chart Patterns

Chart pattern describes the movement of stocks over time. The following are some chart patterns you should learn in penny stock trading:

• Chart: In a clean chart, the price of a stock moves only in one direction- upward or downward. A clean chart shows almost no variation. They are highly predictive and you can take advantage of quick profits through it in a long position.

• Bullish: It shows a stable upward trend. After a brief decline, stock price rises very quickly. At this time many investors decide to invest in penny stocks because you can see the continuity of a trend.

• Cup and Handle: In this chart type, you will be able to identify a shape of a cup and handle. The trend is smooth in downward direction followed by an equally smooth upward trend.

• Bearish: A bearish chart is the vice-versa of a bullish chart. In this chart type, you will observe a definite decline in the stock price over time.

• Messy Stock: In messy stock chart type, you will observe that the stock price jumped for no reason, then fall down a little bit, rose a little bit, again fall down and so on.

• Breakdown: At first, you will see the upward trend in the breakdown chart. The chart looks pretty appealing at the start and then gradually drops down.

• Things needed to succeed in the penny stock market

Creating a set of rules is one of the most important things you should do before investing in penny stocks. Since these set of rules define your trading strategy so the chances of breaking these rules by you are very low.

Before creating a rule, understand the logic behind it. Sometimes, your defined rules may not work for you properly because of your different risk tolerance or goals.

Ways to Minimize Risks Trading Penny Stocks

It’s now clear that money can be made with penny stocks, but you can lose a lot of money as penny stocks are a risky investment. There are some ways you can lower the risk and put yourself on a safe side where actually money can be made with them.

• Pink Sheet stocks are generally manipulated and are fraud stocks. Do not invest in those stocks. Invest in reputable companies as these companies will not only give you a return but are also considered as a less risky investment.

• Focus majorly on trading than on investing. Trading penny stocks everyday will make money rather than investing in the next big stock.

• Avoid overtrading. After finding the desired stocks, buy them, know the perfect time to sell them and take out quick profits.

• Pick stocks from companies of OTC markets strict financial standards are made for those listed companies. These firms have attention-grabbing standard of operations and are less risky.

The Bottom Line

Trading penny stocks is not a great option for beginners because of the high risks and uncertainties associated with them. However, if your risk tolerance is high and if you are a quick thinker then you can make good money through penny stock trading. Now that you know making money is possible from penny stocks, you can educate yourself on how to become an expert in penny stock trading by learning different tips and tricks. Frame your own strategies and be a keen observer as observing trend pattern in penny stocks is very important to gain a good return.

There are many pros and cons with penny stocks and it is truly a personal decision whether to invest or not in penny stocks.