Investing in penny stocks or micro caps or pennies stock is a form of trading stocks or penny stock of small public companies. Are you looking for new frontiers to invest in? Set your eyes through penny stocks and now researching on trading penny stocks? Well, get your pink sheets ready because this one is over the counter. (Not all, so don’t worry)
What are penny stocks?
The United States Securities and Exchange Commission used the term “penny stock” for financial instruments of small public companies that trade under $5 per stock.
Typically, penny stocks are tradeable stocks over the counter (OTC) through the electronic OTC bulletin board.
Some even trade-in privately owned OTC market groups and tier 1 and 2 penny stocks even trade over major exchange markets. The Securities and Exchange Commission used to categorize penny stock with actual stocks valued at a penny.
Yes, you can make money in trading penny stocks but penny stocks always come from stocks of small public companies lacking ready and eager buyers of stocks which makes their stock value highly unpredictable and even undesirable. But, you can also make a sizeable profit which equals the risk of losing.
In most cases, investors can not only lose a huge lump of investment but all of it is also at risk, like any other stock trading, right? Sure, that is one way to look at it. But for us, penny stocks are the edgy guy’s stock trading.
It is pretty much playing on the gambler side of every investor in the stock world so be very careful when entering the penny stock market.
4 Tiers of Penny Stocks
Due to penny stocks being a financial representation of small public businesses, the stock price can drop from 50% to 100% overnight and even open to manipulative market stock prices. These small businesses are also usually start-up businesses trying to rise through public funding making penny stocks highly volatile and risky as much as starting a business itself. We mean, who would want to invest their hard-earned money through risky $ 5 per penny stock.
Good thing penny stock companies are categorized in 4 tiers, which makes it possible for a new investor to have some faith in a small, shaky, start-up company. And not get scammed, while we are at it.
Tier 1: Stocks listed on the major stock exchange
These penny stocks are top tier stocks listed in major exchange markets such as NASDAQ and NYSE. They are less likely to be manipulated due to the companies being required to provide financial information and are not as volatile as those in other tiers. These stocks however are listed as under $5 but can be priced at a higher value per stock.
Tier 2: Traded from 1 to 99 cents
The traditional penny stocks. These stocks can be traded at a fraction of a penny. These penny stocks categorized at Tier 2 are traded from 1 to 99 cents, the original price of penny stocks. Some of these penny stock companies are given the opportunity to be listed on major exchange markets under probation.
They would need to rise above their current penny stock value in a certain period of time to remain listed. If they cannot comply, these companies would be delisted from said major trading markets.
Tier 3: Traded below one penny per share
The companies categorized in the third tier of penny stocks are companies with penny stock prices below a penny. We would not recommend you to invest in these stocks as they cannot even live up to the stock’s name.
Tier 4: Priced between 0.0001 and 0.0009 cents per share
Tier 4 stocks are called trip zero penny stocks as they are priced at 0.0001 and 0.0009 per stock. These stocks are prone to manipulation and if not, can only benefit the first buyers. As they can rise to 100% overnight, you can double your investment overnight.
How to pick winning penny stocks
Making money in your pink sheets is not so easy, good thing and thankfully, it is also not impossible. Here are a few tips on how to pick winning stocks for beginners trying to make it in the penny stock market and are hoping for a long term success.
- Focus on earnings
Always keep your eyes on the company’s ability to earn and recover the debt. These qualities are highly valuable in stock trading as they are qualities that can be used even as for blue-chip stocks level companies.
- Aim for penny stocks with heavier trading volume
Heavier trading volume in any stock is almost always a good telltale sign. Watch out for this determiner as they are the most traded penny stocks around and usually, the one that rises through tier 1 if not already a tier 1 penny stock.
- Follow the “Over .50 Cents Per Share” rule
This “over .50 cents per share” rule is a great limiter when investing in penny stocks. Like we have said earlier, those penny stocks who are way below a fraction of a cent per share are either a very shaky, fairly new business with not much potential or a room for a market manipulation scam. So be careful!
- Don’t trade on hype
Trading on hype is pretty much like impulsive buying. A sudden change in penny stocks is one of its weird norms or quirks, even. So do not rely on hype, rely on its actual share value.
- Know the best “entry price” before buying
Like any other stock trading, you should first research around the market you want to enter. It does not really matter if you are going to be a trader or an investor. A good day means being able to produce money. So go start asking questions first before buying because a friend told you so.
- Use a stock scanner (Trade Ideas)
Using stock scanners will provide you with a higher level of insight and forecast over the stocks you’re trying to look into. As for our team, we use Trade Ideas as it offers the list of major movements in stocks using the software’s artificial intelligence.
Check them out on their website, if you are a serious trader like we are, then Trade Ideas is worth it. They also offer a demo which is 20 minutes delayed and is for free so you can get the feel of the software first.
- Look for these parameters: breaking news, float, and high relative volume
There are three parameters that you can use to look through a penny stock you are vying to invest in.
1. Breaking News – Look for stocks that are garnering attention due to being affected by any news while avoiding those that are being bought out because they usually will only benefit the one who bought them off.
2. Float – Below 50 million shares are where you want to be. The number of shares will determine the interest of buyers which will increase the probability of the stock price to escalate, which is what we all want.
3. High Relative Volume – Stocks that are gapping up due to news usually have a relatively high volume. This is what we should be able to spot as it stocks with high volume will have plenty of liquidity which will then in turn let you trade with a sizeable amount.
Reading stock patterns
You better bring you’re A-game when reading stock patterns. Depending on how much you study these patterns will determine your edge over other stock traders and investors within the penny stock markets. Study and research hard about chart patterns before you actually start to buy into trading and you might just save tons of money by doing so.
- Bottoming-out patterns
This type of stock chart assessment is best described as a stock price is bottoming out after being oversold. It will then start a downward trend for a few months and hit a plateau going sideways. The shares will then have a high probability of entering a sustained price of recovery.
- Price dips
Due to the volatile nature of penny stocks, an imbalance is easily caused by stock sellers outweighing buyers. This is the reason why for penny stocks, we should aim to buy shares with heavy volume. Taking advantage of a price dip in penny stocks can prove to be a challenge especially for beginners.
- Top-out pattern
The opposite of bottom-out pattern. As shares climb up, sellers will capitalize on the opportunity given to them so watch out for stocks topping-out. You might be buying at the wrong time.
- Share consolidation
A good determiner of how well a penny stock is currently doing. Share consolidation happens when some share-holders decide to hold on to the penny stocks while others are looking to sell as soon as possible. So the shares will move sideways above its usual average and keep doing so until only those who want to hold on are left with the stocks. It’s going to be a good day soon for share-holders going through share consolidation.
- Candlestick chart patterns
Candlestick patterns reflect the share-holders’ sentiments. These patterns are typically used to know when to enter and exit trades. They can also show if a penny stock’s pattern is about to reverse.
Gapping occurs when the stock opens above or below the previous day’s closing, missing a trading activity in between. It is fairly common with stocks as stocks do this on a daily basis.
- Going against the trend
There is a trend among stocks, to determine the trend is just looking at other stocks as to where they are going. Are they increasing in price? Are they slow and steady? There are lots of outside factors that determine the trend so if your penny stock is going against the tread on a steady pattern, it is a great sign that your penny stocks is doing well, holding out on its own.
Tips to minimize risks
Of course, no one can fully eliminate the risk especially when trading stocks, its stock value, and the worth of money being invested in penny stock. Until someone discovers how to travel in the future. But what good would trading if not without a justifiable amount of risk entailed? In trading penny, however, we can minimize the risk through simple methods below, just make sure to follow them.
- Avoid low-liquidity penny stocks
Penny stocks with low-liquidity usually are prone to market manipulation or plain and simple bankruptcy. We do not want of course to invest our hard-earned money to a penny stock that will eventually crumble or worse, turn into a scam.
- Don’t fall for their newsletters, promotional pumps
Company newsletters are made by the company itself. Their promotional pumps are more often than not a telltale sign that these share price of a penny stock company is being manipulated and investors are being tricked by the company silver tongue.
- Pick stocks from companies in the OTCQX tier of the OTC markets
A penny stock company that is listed within trusted markets should be your go-to penny stock company for making money. Market listed penny stocks usually are required to file a certain amount of liquidation to keep being listed. This determines how well a company fares in their financial affairs.
- Avoid Pink Sheet stocks
Pink sheet stocks are stocks for trade over the counter (OTC). They got their name from the pink sheets their stocks used before. Today, like everything else, they have gone electronic. However, these pink sheet trading penny stocks usually involve very small and financially incapable or even a questionable company. Stick with registered and accredited ones.
- Avoid pump-and-dump scammers
Pump and dump scammers are a group of investors aiming to sell their stock once sellers take a bite. To avoid pump and dump scammers, avoid hype trading, listening to rumors, getting your trading penny advice from social media platforms.
- Don’t overtrade
As a rule of thumb, we should not overtrade. Big wins do not really amount to anything in the long run. Stick with small wins and your trusted circle of investors to know how the actual trend is going.
- Focus on trading and not investing
To win in trading penny stocks, you should trade. Long term investments should be made on the bigger leagues, the blue-chip companies. Do not get entangled the same as other investors. Stick with trading penny stocks and you will be making that money on a more frequent basis.
- Understand the background of the business
To avoid scammers and other conmen, the best way to safely buy into a penny stock company is simply to check the background of the business. Did they start the business out of passion? Do they look like a business that will withstand the volatility and vicious nature of penny stock trading? What are their core values? Even up to those meticulous details, you should check on to be able to properly minimize the risk of getting scammed or plainly losing money over your gut instinct.
- Diversify your penny stocks
Ever heard of do not put your eggs in one basket? Right, the same thing goes for penny trading. Penny trading is of course cheap in name and in theory but you might end up losing more than what you planned for when consolidating your investments in a single penny trading company. What will we do when the market crashes? It is always good to win big, but as we said before, as the name suggests, go for small, many wins rather than luck out on one big win. That one big win always carries a 50% chance of going bust. You know it already.
- Only risk what you can afford to lose
ALWAYS only risk what you can afford to lose. If you are financially struggling to make ends meet monthly already then I suggest for you to go find another income making method.
Investing is not as risky as trading but in a penny stock, it is more of trading than investing. So watch out on how you spend your money. You might be spending your savings already for that gut feeling you had for a single penny trading company.
Overall, you will determine how you spend your money, trading, investing, or plain money-making methods. The one takeaway you should have at least learned from this article is that there is no such thing as easy money and passive income.
Everything you earn will be determined by how hard you worked for it, or how long you have studied for it. Whatever you read on the internet will not matter once you got the grips of the industry you are trying to enter. And that the best way to earn money is to actually save it.
However painstaking the process of trading maybe, your habit and your will to strive to learn will be the only factor that will matter if you are to rise in this industry. Oh, how easy it would be once you get the rhythm of it all.
We hope this article has provided you with insightful ideas on how to trade in the penny. We sure would love to hear about your feedback.