How to invest in penny stocks

Learning how to day trade penny stocks has skyrocketed in popularity over the years as more and more people gain interest, but what are penny stocks and why are they so popular?

According to the Securities Exchange Commission (SEC), the penny stock definition is any security trading under $5.00 per share.

Most of these companies are relatively new, have a small market capitalization and haven’t established a track record as successful businesses which makes them speculative investments for traders and investors.

 

So, what are penny stocks? Well, for starters, they are cheap which means you don’t need a ton of capital to put on a large position and they regularly have huge runs over a 100% or more in just one day!

The allure of making these big returns has attracted all types of new traders and is why they have gained so much popularity.

However, it is just as easy to lose all your money, or even more if your trading on margin, due to the volatility involved with penny stocks.

That’s why it is important to understand how to trade them and what to look for before risking any of your hard-earned money!

What Are Penny Stocks?

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A penny stock is any stock that trades for less than $5 per share. The SEC used to define it as a stock that traded for less than $1, but inflation has kept up with the market.

You often won’t find penny stocks on the major market exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ. Instead, they’re often traded through the OTCBB and the pink sheets (which we’ll get into more later).

While many investors consider penny stocks to be high-risk investments, that isn’t always the case. And as you probably, know, the counterpoint to a high-risk investment is the potential for high reward. If you trade carefully based on research and market history, you can turn penny stocks into profitable investment vehicles.

Furthermore, since the stocks cost less than $5 per share, you can mitigate your risk by trading smaller numbers of shares — at least at first.

Penny Stocks Definition:

As mentioned above, the SEC defines a penny stock as any stock that trades at $5 per share or less. These stocks also have other things in common, such as the following:

  • Highly speculative: This means that the stock has a high-risk, high-reward balance. If the stock does well, you have a good chance of making excellent returns.
  • Small cap: Penny stocks are generally tied to small capitalization markets. In other words, the company has a relatively low stock valuation — under $2 billion, in most cases.
  • Large bid-ask spread: This means that there is a large difference between the asking price and the bid price. In other words, the amount someone is willing to pay is much higher than the price at which someone else is willing to sell.

What Are Pink Sheets?

Think of pink sheets as the OTC version of large market exchanges. Every day, the National Quotation Bureau publishes a pink sheet with the bid and ask prices for penny stocks and other stocks that aren’t traded on the larger market exchanges.

They were named because of the pink paper on which they were printed, and the stocks traded therein can be identified by the “.PK” added after their stock symbols.

These days, though, brokers can access the Electronic Quotation Service to check on bid and ask prices in real time. Instead of relying on a daily publication, they can make decisions quicker.

While the pink sheets don’t contain as many stocks as those on the NYSE or NASDAQ, there are still more than 10,000 companies that trade in this manner. Most people now refer to the Pink Sheets as the OTC Markets Group.

What is Penny Stocks Trading?

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Penny stocks trading refers to the activity of actively trading penny stocks on markets like the OTCBB and OTC Link. The types of stocks you can find within the Pink Sheets are just as varied as in any other market. The only difference is the extremely low price of each share.

To trade penny stocks, you’ll need an experienced, knowledgeable broker. Some brokers charge extra if you want to trade a large number of shares in a single transaction, while others limit the number of trades you can make in a day.

When selecting a broker or brokerage, go through a rigorous screening process. Find out exactly how much you’ll pay for the broker’s services and whether there are any limits or surcharges related to trading.

How Do I Get Started With Penny Stocks?

The best way to get started with penny stocks is to find a broker and educate yourself on the market. Learn the language and jargon, the types of companies that trade in the OTC market, and as much information as you can about micro- and mid-cap companies.

You should have a specific goal and strategy in mind before you begin trading. Since penny stocks tend to be more volatile, you don’t want to go into this type of investment blindly.

Start with sectors. To which are you most strongly drawn? Next, move on to markets. Figure out which are performing well and which you understand best. From there, you can narrow down your options to individual stocks. Just remember that you shouldn’t marry yourself to a particular stock.

Biased Recommendations

One thing you have to watch out for when it comes to penny stocks is the biased recommendation.

You might have heard of influencer marketing. It happens when a company pays a popular social media user to promote its products. The influencer receives a flat fee for tweeting or posting on instagram, for instance, and the company gets access to the influencer’s audience.

This also happens in penny stock trading. A company that wants to push its own stocks will pay someone in the industry to send out social media posts, emails, and press releases that don’t necessarily look like advertisements.

If you see such recommendations, look for signals that the person might have been compensated for it. By law, they should include language about the post or email being “sponsored” by the company.

Offshore Brokers

how-to-invest-in-penny-stocks-3By Oil and Gas Photographer/Shutterstock.com

Unfortunately, boiler room operations are also more common than you might think. These schemes involve selling stock to foreign brokers at discounted prices, then selling them back to U.S.-based investors for a handsome profit.

The SEC doesn’t require offshore brokers to register stocks, so it’s easy to get taken in by this type of nefarious scam. It’s even easier when it comes to penny stocks because they’re subject to less oversight and because small transactions can easily fly under the radar.

The main tipoff is a cold call from a brokerage. The person will use high-pressure sales tactics to convince you that you can buy a certain number of shares for a “steal.” Always initiate your own investments instead of agreeing to a transaction after a cold call.

Most Common Questions Regarding Penny Stocks

An educated investor is a successful investor. The more you know about the market and its potential, the faster you can build wealth.

Many investors who don’t have experience with the stock market or with penny stocks in particular have the same questions for their brokers or financial advisors. I’m going to answer those questions here in detail so you have all the information necessary to dip your toes into the penny stock waters.

There are five questions I hear very frequently from other investors:

  • Where should I buy penny stocks?
  • What techniques do I need to learn to be successful?
  • How do you find hot penny stocks to invest in?
  • Which are the best penny stocks to invest in?
  • Are penny stocks profitable?

Let’s take these questions one at a time so there isn’t any confusion.

The Final Question: Who is the best penny stock teacher?

I can’t tell you how important it is to find a penny stock teacher who not only has the necessary knowledge to fuel your growth, but who also has the discipline necessary to protect you from making bad choices.

There are a lot of charlatans out there. Some people just want to make money, and they don’t care if they sabotage others in the process. That’s not me. I’ve developed my reputation through brutal honesty and that’s why I have so many self-sufficient and consistently-profitable trading challenge students.**

The best penny stock teacher helps you keep up with the trends, make recommendations, and share his or her trades — even the losses. (Just so you know, I do all those things).

If you’re interested in learning about penny stocking, I’m here to help. I’ve created several DVDs on various trading and investing topics that you might want to check out, and I offer a few courses to give you more in-depth information on a regular basis.

Who is Timothy Sykes?

I’m a guy who knew he wanted to achieve financial freedom, and the way I did it was through pennystocking. When I was in college, I started trading with just over $12,000. Now I’ve made nearly $5 million in trading profits.**

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How did I do it? I studied, paid attention, tracked my progress, and learned how to read charts. I also found mentors in the industry whose successes inspired me.

More than 7,000 students are now learning my techniques through my coaching programs. I’m not afraid to make enemies; if people spread misinformation or attempt to game the system, I’ll call them out so other traders don’t suffer because of them.

I great up in a middle-class family, but I knew I wanted to make myself a fortune. As a result of my success, I’ve invested in plenty of toys, shared my wealth with family members and charities, and taken quite a few luxurious vacations.

More importantly, I have peace of mind.

A Brief Look at My Journey

I made my first million while living in the dorms in college.** Since I’m a self-taught trader, I used my free time to learn everything I could about pennystocking, then I improved upon the techniques I learned based on experience.

I turned $12,415 into $4.7 million, but you don’t have to achieve that level of success to become financially independent.**

Over the years, I’ve built communities and courses to help people learn how to trade more efficiently. I’ve been interviewed by Larry King, featured in magazines like Young Money, and found my name on lists of youngest millionaires.

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Of course, I skipped a lot of college classes to achieve what I did. My Bar Mitzvah money became $2 million**, and I started a hedge fund during my senior year.

I’ve learned a lot along the way. For one thing, I’m better at penny stocking than long-term trading. For another, I have a gift that can help people.

Millionaire Trading Challenge

I’m a big fan of challenging yourself. The more you push yourself to learn and grow, the faster you can build your wealth.

I’m also passionate about helping other people achieve financial freedom. The definition of financial freedom varies from one person to the next, but seven figures sounds pretty good to just about everyone.

how-to-invest-in-penny-stocks-17© 2018 Millionaire Media, LLC

That’s why I started the Millionaire Trading Challenge. You’ll get one-on-one time with me, tons of advice and tips, and a chance to prove that you can turn your current liquidity into seven figures or more.**

Whether you want to replace your day job with full-time trading or simply want to make extra cash for your future, the Millionaire Trading Challenge has what you need. As long as you apply what you learn and continue to grow, you’ll continue to multiply your capital.**

Many of my students have achieved great wealth.** I’ve also been featured widely in the media, from CNN to Steve Harvey. If you want to learn my tools of the trade, sign up for the Millionaire Trading Challenge and start trading yourself to success.

Penny Stock Chart Patterns

One of my all time favorite patterns is the bull flag pattern. It is super easy pattern to spot and it has a defined risk point where you know exactly when you are wrong on the trade and it is time to get out.

You want to see the stock run higher and then have a light volume pullback, usually to the 10 or 20 day moving average on the 1 or 5-minute chart, where it will find support and buyers will jump back in to take it higher.

The key to trading this pattern is waiting for volume to pick back up as buyer’s pile in and then jumping in with them.

My other favorite pattern is a flat top breakout over premarket highs. Shorts will put stop orders in just above highs so I know if it breaks above it we will see their buy stop orders trigger which will help push shares higher.

This pattern isn’t as easy to define risk so you can go about it a couple different ways. You can use the low of the candle that breaks out above the premarket highs OR you can use a set amount to risk like 20 cents for example.

5 Tips To Live By As A Penny Stock Day Trader

  1. Avoid OTC/Pink Sheet-Listed Penny Stocks  Companies trading on the OTC (over the counter) market have fewer regulations placed upon them as compared with stocks listed on the NASDAQ and NYSE. As a result, stocks on the OTC market are highly susceptible to manipulation and fraud. The only penny stocks I trade are listed on the NYSE or NASDAQ. I know these companies are facing stricter requirements to maintain compliance
  2. Don’t Fall for the Promotional Pumps!  Many OTC Penny Stocks become promoted at one point or another. These promotions often come with messages like “this stock will be the next Apple”. The reality is, the next Apple is not likely to come from the penny stock world. It’s more likely the next big tech company will start as a large company that IPO‘s well above the penny stock price range, and then continues higher. When you are buying penny stocks to hold in hopes that it will be the next Apple, you become an investor of one of the most speculative financial instrument on the market.
  3. Only Trade Penny Stocks with Volume It’s really important to avoid illiquid penny stocks. Most penny stocks trade only a few thousand shares a day. However, when a penny stock has breaking news, they will often trade at 40-50x relative volume achieving 5 to 10 million shares of volume on a big day. These are the days I’ll trade a penny stock. The good news is that there is a penny stock having a once in a year event almost everyday! This means as a trader there is almost always something to look at.
  4. The Hit and Run Approach Once a penny stock has met my standards for being worthy of trading (having news, volume, and being NYSE/NASDAQ listed), I’ll look for one of my Go To setups. These include Momentum, Gap and Go, and Reversal Trades. An important rule is that I should never over trade these stocks. For that reason, I only take the most obvious setups.I buy in the place where I expect thousands of other traders will also enter. These entries are based on support and resistance patterns. Once I have a profit, I sell 1/2 my position and adjust my stop loss to break-even. By quickly taking profit and adjust stops, I ensure small winners at the least. Occasionally I’ll get into a penny stock and get a big winner, but as a trader, I look for many small wins.
  5. Making a Living 1 Trade at a Time It’s important that I don’t look to hit home runs, to make 10-20k in a single trade. My focus is to trade penny stocks almost everyday and have a daily goal of $500-1k/day. That means anywhere from 100-200k in annual profits. Many small base hits ads up over the course of weeks, months and years. My focus is making a living by trading, rather than investing in penny stocks.

Want To Learn More?

Many beginner traders start their trading journey with penny stocks. We actively encourage traders to AVOID penny stocks and instead trader stocks priced between $3-10.00.

These are stocks that have the potential to make 20-30% intraday move, but retain the security of being listed on NYSE and NASDAQ.

As a result, they are more popular among traders and are often considered safer vehicles for trading and investing.

Penny Stocks Webinar

As you probably already know, I’m an active trader of stocks priced between $2-20, and occasionally trading stocks as high as $200. I trade stocks reporting breaking news such as earnings, contracts, FDA announcements, or other PR’s.

I look for that stock that is having a once a year event because that’s the stock every day trader will be watching.

Understanding Penny Stocks and Penny Trading

Image via Flickr by Katherine Ridgley

Penny stocks are stocks that trade for under $5 per share. Stocks that trade for under $1 used to be from small companies trying to establish themselves in the market, which made them speculative and often volatile investments for sharp investors and traders.

Now, stocks priced between $1 and $10 are considered speculative and volatile investments, sometimes experiencing a 50 percent drop or 100 percent rise overnight. Penny stocks are at a higher risk of manipulation as well, which is the act of artificially inflating or deflating the price of the stock or influencing the market for personal gain. Because of this, many investors and traders are wary of getting started in penny stocks, and it’s always important to prepare for the possibility of a total loss. That said, penny stocks have the potential for incredible profits if you know how to play them right.

Here are the types of penny stocks available to trade:

  • Tier 1 Penny Stocks: Tier 1 penny stocks are listed on the major exchanges, such as NASDAQ or NYSE, and are typically priced under $5 per share, but they can be slightly higher than that. These stocks are speculative but not as volatile because they are required by the exchanges to provide financial information. They’re also held to a higher standard than over-the-counter penny stocks and less likely to be manipulated. If you’re looking to invest in penny stocks, choosing Tier 1 stocks gives you the peace of mind of knowing the company won’t vanish overnight.
  • Tier 2 Penny Stocks: Traditional penny stocks, as the name suggests, are priced between 1 cent and 99 cents. They’re never under 1 cent, though stocks can be traded on fractions of a penny. Like Tier 1 stocks, they can be listed on NASDAQ or NYSE. These companies get a public letter stating that they need to meet the minimum listing requirements of the exchange to have their stock above $1. If they meet these requirements, the stock is listed, but if not, it’s delisted and moved to the over-the-counter market exchange. Stocks over $1 will never have a spread less than 1 cent, which means they can trade at 1.01 by 1.02, but never 1.015 by 1.017. If a stock trades below $1, they will trade down to fractions of a cent.
  • Tier 3 Penny Stocks: Sub-penny stocks are stocks that are below 1 cent per share, starting at .0099. These stocks won’t be listed on NASDAQ or NYSE, so they don’t have any minimum requirements to meet. In general, a company that isn’t strong enough to have its stock priced at 1 cent per share, at least, isn’t likely to give you the returns you’re looking for.
  • Tier 4 Penny Stocks: Trip zero stocks are priced with three zeros, so at .0001 and .0009 per share. Even an incremental increase in these stocks is a 100 percent move over the entry price of .0001, so they’re often manipulated. “Hot penny stocks” promotions are often sub-penny or trip zero stocks that are designed to benefit the original trader, rather than giving you any real edge.

Penny Stock Terminology

Before you learn how to buy penny stocks, let’s cover some of the common terminologies:

  • Pump and Dump: A pump and dump is when a stock is promoted to sell at higher prices, usually using deceptive language. A stock promoter will tell traders that a stock is expected to rise, and knowing that there will be an influx of buy orders, they’ll get in early and get out before the inevitable crash comes.
  • Reverse merger: A reverse merger is a cheap, quick way for companies to offer an initial public offering. It usually occurs between a penny stock company and a developmental company in order to hype up the newly-public stock price.
  • Margin: A margin is used to borrow shares from your broker in order to short sell stocks.
  • Leverage: Leveraging is borrowing capital from your broker that exceeds the money in your account. This comes with incredible risk since you could end up losing your own money and still owing money to the broker.
  • Short squeeze: A short squeeze is when a short seller tries to avoid losses by buying enough to cover their positions. If you’re betting that a stock will fall, you risk squeezing the stock as you buy and cover positions while the stock price rises against you and the other short sellers.
  • Hard to borrow: When you short sell, brokers need to find available shares for you to short. If there aren’t enough shares to short of a specific stock, the stock is known as “hard to borrow.”
  • Pre-borrows: Pre-borrows give you the option to reserve shares of hard-to-borrow stock in advance to short later on, which can help you gain an edge over other short sellers.
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Analyzing Penny Stocks

Stocks are usually judged by the performance of the company, but this isn’t a complete strategy when dealing with penny stocks.

Fundamental analysis, or fundamentals, is based on the company’s actual business, such as its revenue, losses, profits, and projections, which can be used for valuation and investing. A company’s earnings-per-share, or EPS, is the profits divided by the total number of outstanding shares. The price-to-earnings ratio, or P/E ratio, is the stock’s price divided by its earnings, which is used to determine how expensive the stock is. All of these can influence penny stocks.

Technical analysis, or technicals, is another strategy in trading and investing. This method judges a stock on the price action and chart patterns, rather than information about the company itself. Technical analysis is often used in conjunction with fundamental analysis, but rarely on its own.

Why does this matter? Unlike traditional investing, penny stocks are all about the technicals. With lightning-fast trades and limited company information, fundamentals for penny stock companies aren’t much help. Technicals can give you insight into the movement of penny stocks, however, which is how you cash in.

One key element of technical analysis is a stock’s moving average, which is the average price of the stock during a specific time period. Basically, this cancels out the “noise” of market fluctuations to find the true trend over time. Shorter moving averages are better for short-term trading, such as penny stocks, because of the lag in prices.

A rising moving average indicates that the stock is in an uptrend, while a declining moving average indicates a downtrend. If a short-term moving average has a bullish crossover, meaning it crosses above a longer-term moving average, the upward momentum is confirmed. If the short-term moving average has a bearish crossover, meaning it crosses below a long-term moving average, the downward momentum is confirmed.

Here are some other elements of technical analysis:

  • A breakout is a price movement through an identified level of resistance, which is typically followed by increased volatility and heavy volume. This typically occurs when there’s an excess of supply that overwhelms the demand, impeding the upward movement, such as with breaking news and developments.
  • A breakdown is a price movement through an identified level of support, which is typically followed by sharp declines and heavy volume. Because this can signal a downtrend, this is a common time for the short sell.

Each of these elements can give you valuable insight into the performance and predictions of a penny stock.

Investments That Can Influence Penny Stocks

There are several different investment types in traditional investing, all of which may have an influence on the performance of penny stocks.

  • Stocks are the best-known type of investment. Stocks are percentages of ownership in a company, not an investment in the company itself, and can fluctuate in value.
  • Commodities are physical substances, such as oil, gold, or other precious metals. The prices of commodities can influence penny stocks, though not by much.
  • Derivatives are futures and options, which derive their value from other investment types. They can influence penny stocks, but there’s not a direct correlation.
  • Real estate investment is a common choice for conservative investors to grow their wealth. Real estate investments can influence penny stocks in some ways, such as if a penny stock company owns a lot of real estate.

Even if you’re familiar with trading some or all of these, it’s important to remember that penny stocks are an animal all their own.

Finding Penny Stock Brokers

Though most people think of brokers as the big-time brokers on Wall Street, there are many different types of brokers in investing and trading.

  • “Boiler room” brokers are brokers who use marketing techniques to take advantage of inexperienced investors. They have a powerful influence on penny stocks, however, and often try to manipulate them.
  • Online discount brokers can be found on online brokerage sites and handle electronic trading. These brokerage sites require very little money to sign up and are a great way to learn penny stock trading online.
  • Full-service brokers can be found at small and large firms, though they usually avoid penny stock trading. These are licensed brokers who don’t want the liability associated with trading risky penny stocks.

When you’re searching for the best penny stock broker, there are several things to consider. Brokers add a surcharge to stocks that are priced under a certain dollar amount, and this value can vary by broker. Because penny stock trades involve large numbers of shares that can ramp up surcharges, it’s especially important to find penny stock brokers with a flat commission.

Some penny stock brokers also have volume restrictions for trades. The best penny stock brokers will allow trades of unlimited shares without any additional fees, giving you the chance to maximize your possible profits, so there’s no reason to pay more for your large orders. Some brokers limit the number of shares you can trade in one day or in a single order, and since this type of trading is the foundation of penny stocks, you wouldn’t want to miss out on opportunities for fast, cheap trades.

Trading restrictions are another thing to look out for when finding a penny stock broker. Brokers who require you to trade penny stocks by phone order or limit the types of trades you can execute will impact your ability to trade successfully. Like any other stocks, you should be able to sell and buy penny stocks online without any hassle.

How to Trade Penny Stocks

Traders seeking to profit from trading penny stocks should make sure there is liquidity and volume, so that entries and (most importantly) exits can be executed quickly and seamlessly without issues with fills. It is very important to have a direct access broker for execution. Penny stocks tend to get spurts of volume that eventually peak out and leave many traders trapped at higher prices. It is prudent to do some research to make sure that there is some legitimacy to the underlying company, but always remember that you are playing the price action and have your exit plan in place, before taking a position.

You should be aware that these are the most speculative type of stocks in the publicly traded markets. The landscape can be fraught with fraud and ‘pump and dump’ scams perpetrated by stock promoters. However, these stocks can regularly make triple digit moves, but maintaining the gains can be another story as most penny stocks end up burning investors. Most conventional online brokers do not allow margin for penny stocks, making shorting almost impossible. Short-able shares are also very hard to locate borrows to short and are notorious for short squeezes.

It is important that you have a trading method or system. Be careful with penny stocks that are being pumped up by stock promoters through newsletter and direct mail pamphlets. These stocks are highly manipulated forms of pump and dump schemes. Be sure to read the disclaimer on the newsletters, as they will indicate (in small print) how the promoter is being compensated for pumping the stock.

Penny Stock Trend Reversal

Waiting for a penny stock to reverse can help protect you from additional risk.

Long and Short Signals

Long Signals should be played on reversion signals, breakouts and up trends depending on your trading system. Be careful not to chase in overbought conditions. Shorts are very tough to attain on penny stocks, therefore the majority of trades will likely be on the long side with no ability to hedge a position. This limits the type of trades that can be made. Be sure that entries are taken at advantageous prices.

Short Signals should be played on reversions, breakdowns and downtrends, if you are able to find short-able shares. Usually when penny stocks get a large extended run, the 4th day tends to be the most advantageous time to short due to exhaustion. Taking profits quickly is important. Due to liquidity issues, the pullbacks and reversals can happen very rapidly as sentiment can turn on a dime on penny stocks. Exits are a top priority.

Stop Losses

The difference between a trader and a proverbial ‘bag holder’ is that the trader was prudent enough to keep a stop loss. Don’t end up being a bag holder. Penny stocks that breakout and peak can suffer severe pullbacks and may take a long time, if ever, to recover the highs, especially if they were pumped up by stock promoters.

Stop Loss

A stop loss allows you to control your risk by placing a sell order in case the trade goes against you.

Volume and Spreads

If you are interested in trading penny stocks, then make sure the average daily volume is higher than at least over 300,000 shares and trading above $0.50/share. Spreads can be relatively wide often up to 10-15% between the inside bid and inside ask price. As tempting as it can be to trade sub-penny stocks, these are extremely risky. Penny stocks that are trading on national exchanges like the NYSE or Nasdaq tend to have more liquidity but may be fundamentally damaged. The major exchanges don’t usually allow for penny stock listings. Penny stocks on those exchanges were once regular trading stocks until some fundamental issues caused serious material impacts to drive the prices into the penny stock levels. Issues like severe business downturns, FDA rejections, legal judgments, regulatory and government issues and bankruptcies can transform a regular trading stock into a penny stock in a matter of days.

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Special Situations

Situations that transform a normal stock into a penny stock can provide opportunities for a reversion or dead cat bounce. One of the most effective strategies is to check the company’s cash per share. If the cash per share is higher than the current stock price, then that value may be used as a price target for long trades on the bounce. Keep in mind; this is a strategy only to be used for a short-term bounce. Stocks that melt into penny stocks do so for a key reason, the fundamentals have changed drastically. These stocks are on a downward trajectory and need time to form a sufficient base. Some will never recover and this has to be understood.

Where to Invest in Penny Stocks?

The way I see it, there are three markets, in particular, that have drawn my interest in terms of where to find the best penny stocks to watch. Before we get to those three, however, it’s worth talking about an honorable mention.

I am a strong proponent of the artificial intelligence (AI) market, and I believe that companies that harness the technology and use it to its fullest capabilities will be among the tech titans of the future.

The only issue is that a lot of big players, with vast amounts of resources are competing in this space, and they often buy up smaller competitors before they get to market, especially when it appears they are nearing a breakthrough or developing innovative tech.

Having said that, AI penny stocks could be some of the more valuable stocks on the market, due to the industry potential. Of course, as with the first step, you’ll want to check out each company individually before getting too hot on AI. The first barrier is finding them.

With AI out of the way, let’s get to the three sectors I see poised for growth and ones that could have plenty of penny stocks to choose from. The three are:

  1. augmented reality (AR);
  2. lithium mining; and
  3. marijuana stocks. 

Marijuana as an industry already has some of the hottest penny stocks to watch. Its track record for transforming stocks worth less than a dollar into ones with exponential gains has been demonstrated already several times over.

Lithium mining is projected to come into two different crosswinds that can help put the wind in its sails. The first is the increasing demand for lithium as the material becomes integral to powering everything from zero-emission cars to our homes. The next is that lithium is jumping in price as a result of said demand. These two factors can help companies that already have stakes in lithium mines grow.

AR has been lauded by tech luminaries like Apple CEO Tim Cook, and its potential was put on full display with the roaring (if short-lived) success of Pokémon GO.

These three industries might be some of the better ones to watch, especially where penny stocks are concerned.

The penny stock market is often a large beneficiary of an industry-wide trend or push, and these three sectors are all looking to be on the rise, both in the near term and in longer projections.

Beware of Pump and Dump Schemes

Before we continue with this penny stock investing guide, you must understand the additional risks. Because these stocks are so small, they are more easily manipulated. Though it is against the law, many penny stocks have been promoted in pump and dump schemes.

What happens in a pump and dump is that a promoter buys a bunch of shares of a certain penny stock, then convinces his audience to buy those shares. While investors think they are getting a good deal or a good investment, the promoter waits for the stock price to shoot up and then sells his shares to make a handsome profit. The promoter will often say whatever he can to get those shares higher.

In even more elaborate schemes, the promoter will sell early access to his stock pick. He releases his recommendation to the high paying clients first, then release a recommendation to his free audience.

The high paying clients will see a nice bump in the share price, but the last victims will be stuck with bad shares as the promotion ends and the stock price returns to normal levels. This type of pump and dump is very convincing because investors often see early success initially. Of course, it never lasts long and it tails off as the scheme plays out.

These are the major risks behind penny stock investing. To review, let’s look at the pros and cons in a nice consolidated table. 

Penny Stock Investing Risks

  • Easily manipulated
  • Highly volatile
  • Pump and Dump schemes
  • Low regulation
  • OTCBB and Pink Sheets very risky

Penny Stock Investing Rewards

  • Can make very high gains
  • Don’t need a lot of money

What if there was a way to achieve all of the pros of penny stocks without most of the cons? I think it’s very possible, if you pay attention to what I’m about to say.

Now the SEC formally categorizes a company as a penny stock if it trades under $5 and is not traded on a major exchange. But remember that the whole reason penny stocks are attractive is because they are priced so low. Also remember how I said there are stocks on the NYSE and NASDAQ that trade under $5, there just aren’t as many.

This is how to trade penny stocks without all of the risks. Don’t buy what the SEC classifies as a “penny stock”, but instead buy one that’s trading on a major exchange!

By buying from a major exchange, you remove the easily manipulated stocks that are often victims of pump and dump schemes. You receive all of the benefits of full regulation that the stocks on Wall Street trade at, but with stocks at much lower prices. And you get rid of the exposure to the bloodbath that is known as the pink sheets and OTCBB.

How to Find Penny Stocks

The next step is finding major exchange penny stocks.

There’s many ways to do this but I’ll show you exactly what I do. I’ve done it to buy a “penny stock” from the NYSE before, and I do it for every single one of my investments.

The place to go is a free website called finviz.com. They have financial data for every stock traded on a major exchange. Finviz will show you every stock available to you, as well as let you quickly sort between stocks.

best penny stocks

Click on the link to go to their website. Once you are there, click on the “Screener” tab. Now you will see some filters. Under Price in the far lower right corner, click on “Under $5”. Under Exchange on the top left, click on either “NYSE” or “NASDAQ”.

This will give you all the penny stocks available to trade on each major exchange. Now before you start blowing your life savings, let me give you some quick rules to live by.

1. Never put all of your money on 1 stockEvery successful investing plan requires diversification. Even the best stock pickers in the world make mistakes, and nobody can predict the future. Aim for a portfolio of around 20 stocks.

2. Never buy a stock with negative earningsA company that is losing money is a huge red flag. Trust me, I’ve done countless hours of research on stock market bankruptcies and what makes them happen. Negative earnings is the most shared attribute. You’ll know a stock has negative earnings if the P/E shows a – sign.

3. Try to get a stock that pays a dividendThe best way for management to show that they are on your team is by paying a dividend. It shows that they care to attract sensible investors who want to make money. Besides, this is the best way you will create wealth. A good long term investment with dividends will show you the power of the 8th wonder of the world, compounding interest.

4. Use trailing stopsThis single rule will solve the problem of never knowing when to sell. The principle behind a trailing stop is that it lets your winners ride while cutting your losses short. By trailing your gains, you can participate in most of a stock’s gains while protecting your downside. I use a 25% trailing stop. Read more about trailing stops here.

5. Research as much as you canYou need to learn what all of the ratios on finviz mean. Success in penny stocks requires the same dedication and research as success in regular stocks. Find mentors who know what they are talking about. Look at what successful investors like Warren Buffett have done.

I hesitated sharing all of this with you because this is powerful ammunition. You must be cautious when it comes to the stock market and leave your greed at the door.

Small stocks in particular can quickly be wiped out like flicking a pesky fly. Stocks trading at low prices often do go bankrupt or face heavy investor losses. This is why it’s so important to equip yourself with the best knowledge and research.

While I don’t consider myself a penny stock investing expert, I have helped hundreds of people start investing on my blog. This penny stocks for beginners is a good starting point guide, but I really go into detail further with my 7 Steps to Understanding the Stock Market guide. In there, I explain in simple terms what important ratios like P/E, P/B, P/C, and P/S mean and more.

Best of all, it’s free. I could easily charge for this information, but I want it to reach as many people as possible. The principles I share have been passed down from generations of successful investors, from Warren Buffett to his mentors and beyond.

I think you could make a lot of money in the stock market. Shoot, maybe you can even be the next Wolf of Wall Street. But it will take research. And time.

To the prospective penny stock investor, I leave you these two fantastic quotes. I hope you’ve learned a lot from this guide.

“Many an opportunity is lost because a man is out looking for four-leaf clovers.” –Anonymous

“Risk comes from not knowing what you’re doing.” –Warren Buffett

**All Rights Reserved. Investing for Beginners 2015****Penny Stock Investing for Beginners: 5 Rules (Guide)**

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