3 min read
Penny stocks sound cheap, don’t you think?
Yes, because they are. They are also called micro-cap stocks
Penny stocks describe shares of a company that trades for low amounts. It is usually between $0.01 to $2.00. But some institutions count a penny stock is anything that trades for less than $5.00 per share.
They’re not expensive, so what’s the catch?
So why trade penny stocks?
Everyone who entered the stock market knows that penny stocks equal a bigger risk than regular stocks.
The reason for inflated risk is simple. The companies that hold penny stock typically have no profits and minimal operations.
Many of these companies are speculative because they are thinly traded, usually over the counter instead of on major exchanges like the New York Stock Exchange.
They usually trade on the pink sheets or on FINRA’s over-the-counter bulletin board (OTCBB) and are not required to file with the Securities and Exchange Commission (SEC).
These stocks have low liquidity due to a lack of buyers and sellers. Hence, orders may not be filled right away or even at all. Moreover, volatility tends to be high among OTC (Over-the-counter) stocks, and bid-ask spreads are frequently large.
Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.
Plus, penny stocks are notorious for being part of so-called pump-and-dump schemes. The scammers buy up shares and then promote it as the next hot stock on blogs, message boards, and e-mails. Once the stock price is unnaturally pumped up by all the gossips, the scammers sell their stake. The investors stay with big losses.
Where penny stocks have the advantage is the low cost.
Also because of the simple math of penny stocks. If you buy shares for $0.40, and if the stock goes up by $0.20, then your profit is at 50 percent. That’s the pie-in-the-sky scenario.
However, it’s just as easy for your $0.40 share to go down by $0.20 and lose 50%, instead.
So, a $1,000 investment could lose value pretty quickly.
Of course, not everything is so dark.
Several years ago, CNN published a story about a young man who made his first million dollars from trading penny stocks.
He decided to begin with his life savings of $1,500. And 3 years later his portfolio was worth more than $1 million.
See how worth it was.
So, how to trade penny stocks?
We warned you but, yet you still want to trade penny stocks.
It is possible to trade penny stocks successfully.
If you trade penny stocks successfully, they really can offer the greatest risk-reward ratio of any investment type. But take care, the odds are not in your favor if you don’t understand what you’re doing. The must is, you have to learn. You must have the knowledge, education, in order to understand the market to successfully trade penny stocks.
And you must stay far away from scammers. Read the fine print on any email or ad you see on social media and in emails. If you find a disclaimer at the bottom of a social media post or an email, be cautious.
That means that someone’s getting paid to post an ad.
It’s possible to profit when you understand the game, but the odds are against you when you don’t. And worse: manipulators and scammers often run the penny stock game.
For investors who can’t afford shares of Apple, for example, the potential gains from trades like this are too good to pass up.
So penny stock trading prospers. With a relatively small investment, you can make a nice return if the trade works out.
So, if you spot an advertisement that promises dollars from your pennies just remember these several rules:
Never trust the sweet stories
You must not believe the penny stock stories that are touted in emails and on social media websites.
And you have to say no. Let’s say, you can’t invest in penny stocks as if they were lotto tickets.
Unfortunately, that’s what most people do, and they lose over and over. Think of penny stocks as people that you can’t trust.
Instead, focus on the profitable penny stocks with solid earnings growth and which are making 52-week highs.
Read the disclaimers
Penny stocks are sold more than bought. They come as tips in emails and newsletters.
Remember, the free penny stock newsletters are not giving you tips out of the goodness of their heart. Read the disclaimers at the bottom of the newsletters. And you will see. They are getting paid to pitch a stock because their investors want a presentation for the company. There is nothing wrong with that, but almost all penny newsletters make false promises.
You have to know something. There is a difference between stocks making a 52-week high based on an earnings breakout and stocks making a 52-week high because three newsletters picked it. The disclaimers at the bottom of the email or newsletter, which the SEC requires, reveals very often a conflict of interest.
They are being paid to pump up the stock, but they rarely tell you when to sell. Usually, it’s far too late.
Sell your penny stock quickly
The charm of penny stocks is you can make 20% or 30% in a few days. If you make that kind of return, sell quickly.
Never get greedy, aiming for a 1,000% return. The penny stock is getting pumped up, take any profits. And move further.
Never trust company management
Don’t believe what you hear from companies in this penny stock’s world.
The companies are trying to get their stock up so they can raise money and stay in business. That’s okay, but there is no reliable business model or accurate data. So, most penny stocks are scams that are created to enrich insiders.
There are large circles of the same people run promotions using different press releases and companies.
Never sell short
Don’t do it.
Penny stocks are too volatile. If you’re on the wrong side of the trade, you could lose 50% or more on a short squeeze. Another problem is that it’s difficult to find shares of the penny stock to short. Leave shorting penny stocks to the pros.
Focus on penny stocks with high volume
Stay with stocks that trade at least 100,000 shares a day. It could be difficult to get out of your position if you trade stocks with low volume.
Traders Paradise suggests that you trade penny stocks that are priced at more than 50 cents a share. Penny stocks that are trading less than 100,000 shares a day and are under 50 cents a share are not liquid enough to be in play.
Don’t trade large positions
You really need to be careful with position sizing. Never learn the hard way not to trade big. Famous traders rule is not to trade more than 10% of the stock’s daily volume.
The limitation of position size will provide you to get out of the stock faster.
The bottom line
If you want to invest in penny stocks you have to learn.
By the way, learn from Timothy Sykes, who is famous for turning his Bar Mitzvah gift money of about $12,000 into millions by day-trading penny stocks while in college. For the past years, Sykes has been teaching his strategies through the sale of instructional newsletters and video lessons. You can find his lessons very easy.