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How to Trade, Buy & Invest in Penny Stocks
Penny stocks are often frowned upon by the Wall Street big boys.
For example, to the Morgan Stanleys and whatnots of the world, penny stocks are unimportant and are largely ignored, and that’s likely for a couple of reasons.
Penny stocks, for one, are volatile. Every little swing in the stock price—in dollars (or cents, rather) represents a huge swing expressed as a percentage. And if you’re holding enough shares of a penny stock when it takes a dive, a trader could lose some serious cha-ching.
Another reason why the big boys don’t often play in penny stocks is that for them, it just isn’t worth their time.
If you have a lot of money, there are probably “safer” bets out there to make, like, say, on blue chips or something like that.
Of course, every trader has to start somewhere, and that’s the true beauty of penny stocks.
And even veteran traders who started out in penny stocks still trade in penny stocks today, because it offers traders a unique opportunity that is not offered by most blue chips.
So in a nutshell that is “A Tale of Penny Stocks”, Now to more technical details on what penny stocks are.
Let’s get started!
So what is a penny stock?
A penny stock, strictly speaking, is any stock trading at less than $5 per share. But there isn’t necessarily a consensus on what makes a penny stock a penny stock—some traders would consider even some $8-per-share stocks as a penny stock.
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The allure of a penny stock is that you have more of an opportunity to grow your trading portfolio with a penny stock than, say, a stock such as Apple.
Sure, Apple ($APPL) is a big company. It’s probably super safe, too.
It’s also unlikely that you’re going to get rich off $APPL in the next year with your $1000 account balance because at the current stock price of $216.88, you can afford about 4.6 shares.
- Since January 2018, $APPL has grown by $46 per share.
- That’s a lot… unless you’re talking percentages.
If you bought 5.9 shares ($1,000 worth) on January 2nd at the then price per share of $170.16, that would net you $214.91 in 10 1/2 months.
Uglier still, $APPL has grown $142.55 per share over the last five years.
That would have netted you $841.05 over five years—less than $200 in profit per year.
It’s just hard to make any kind of headway with a modest account balance and big blue chip stocks.
Enter: The wonderful world of penny stocks.
Unlike blue chips, penny stocks can move your $1000 balance quite nicely.
It’s not unheard of for a penny stock to jump hundreds of percent in a day or two, or even in hours. Your money has more weight here.
What are the potential pitfalls of a penny stock?
Because of how low-priced the stocks are, companies that trade at the penny stock level are often still in the developmental stages—and that could mean anything.
The company could go belly up or it could make it big, or it could end up somewhere in between.
Maybe they only have one product.
There are also many rather “sketchy” companies in this category as well. This is precisely what makes this category of stock so unpredictable.
It’s also what makes it wildly lucrative (and highly risky).
So, given the risk associated with penny stocks, how in the world do you make a profit with them?
You have to first understand what a penny stock is. Remember that while you are buying a piece of the company when you purchase a stock, that’s not your purpose.
- You’re not out to “invest” in a company.
- You’re buying the stock, not the company.
- You don’t care if the company makes it big in the end, or whether it ultimately fails.
- You only care about what the stock price looks like short term.
That’s a crucial distinction.
Many traders make the mistake of trading penny stocks like they would a blue chip like $APPL.
They look at the company, they look who’s at the helm, and they look at what products they’re offering, and then they decide whether the company has “good bones” or whatever.
For a penny stock, you have to go in with your eyes open.
Know that most penny stock companies will ultimately fail.
You have to understand, as Timothy Sykes put it in his interview with Larry King, that “momentum can push them up dramatically for a few hours or days.”
It’s important to get out before the run is over.
You don’t need the company to be successful on the whole.
You only need to see patterns, understand what they mean, and determine if the price is going up or down.
And if up, how far up. Then, you can get in, and get out at a high before it comes back down.
There doesn’t necessarily have to be a solid catalyst for a stock price to go up.
There just has to be a perceived catalyst. And a catalyst could be as simple as a pump and dump scheme.
You just have to know what is moving it, and judge accordingly.
Penny stocks, while risky, are anything but random. If you can spot the patterns (such as the dead cat bounce) and know what’s behind the moves, you have an opportunity with penny stocks.
According to lead trainer Tim Bohen, financial statements are not important unless you’re looking at a short sale.
“We’re not looking at financials. We don’t read financial statements, we don’t read SEC filings. We want to see a story and a price movement.”
Where do you find penny stocks to trade?
The list is ever-changing, so this is something that needs to be done every night.
You can’t just drum up a list of percentage gainers and use the same list for a couple of weeks.
It’s a fast-moving segment that you need to be prepared to keep up with.
After you find the list of percentage gainers, you must then look for the story behind it. This takes some time and devotion to the craft of penny stock trading, but the rewards are huge if you are willing to stick with it.