What are Penny Stocks?
Penny stocks are stocks with a low share price. Any stock trading below $5 per share is basically a penny stock.
Most penny stocks are not traded on big stock exchange markets like the New York Stock Exchange (NYSE) or NASDAQ. This is because these are stocks of companies that cannot afford to file regular financial statements with the Securities and Exchange Commission (SEC).
For that reason, most penny stocks are traded through Over-the-counter (OTC) means.
This is done based on price listings on the Over-the-counter Bulletin Board (OTCBB) and Over-the-counter Link.
In basic terms, if a company’s stock is not listed on the big stock exchanges such as NYSE or NASDAQ, then its stocks can only be traded Over-the-counter.
This also means that such a company finds it difficult to meet SEC regular financial reporting like the big companies.
These are the reasons which may prompt a company to fall in this category:
- It is a growing company meaning it’s not big enough.
- It is a falling company and therefore in bad financial health.
Therefore, the share prices of such companies will not be highly valued.
They will most likely trade under $5 per share.
It is the stocks of such companies which are considered penny stocks.
Normal vs. Penny Stocks.
In trading normal stocks, traders look for a stock of a company listed on major stock exchanges.
This is because security listed companies can manage to provide financial records to the SEC and therefore there is much information on them.
A trader can then confidently invest in that company’s stocks because you will have a clear picture of what is happening in the company.
On the flip side, penny stocks are different.
Penny stock companies do not provide any financial records to SEC and therefore not much information is out here about them.
If you ask me, this means that trading penny stocks is very risky because you do not know much about the company assets you are trading.
And here yet comes another bombshell – for the purpose of this guide, I will rephrase it into a question.
Can you really make money trading penny stocks?
In this post, I will show you how to make money trading penny stocks in India.
Choose your penny stocks wisely.
What makes a penny stock potentially profitable?
- The company makes profits and not losses. This means that it is a growing company or a recovering company after a financial dip. A company that makes consistent losses will eventually fail, and its stocks will also nosedive.
- Intact financial standing of the company in terms of cash and assets. Though a small company, it needs to stand on its feet so that you can see a future in its stocks. Staggering companies are a bad investment.
- Goals and robust strategies to grow. Companies without clear objectives may fail. If you invest in their stocks, you will go down with them.
Pick the best penny stocks.
You have a huge list of penny stocks you have derived by employing the first criterion. You now need to narrow down to the penny stocks which have the highest chances of growth.
How do you reach the best stocks? What filters do you apply?
- Go for penny stocks with less float. Float is the number of shares available to trade. Investors show more buying interest for companies with fewer shares to trade.
- Sample for penny stocks that gap up after news releases. They portray a good sign of growth as opposed to those that do not.
- Pick penny stocks that have a high relative volume. This means that many are trading it hence driving liquidity.
Trade penny stocks like a pro.
Once you have sampled the best penny stocks using the check above, you now want to trade them like a pro.
It is the only way you can make money trading penny stocks.
Penny Stocks Trading Strategy – technical analysis of chart patterns.
- Candlestick patterns – these are a sure way of showing the psychological state of the market. Spot candlestick patterns like the three white soldiers, the morning star, and bullish engulfing more often on the stock price chart, and that will speak volumes about the growth of such a stock. It is a penny stock worth considering for buy, but that is not enough information, so look for other hints.
- Sudden dips in the price – if the price of a penny stock falls suddenly and such is not accompanied by a drop in volume, then you can conclude one thing. Such stock will grow from that dip very soon. Properly time a good entry to buy such a penny stock.
- Top-out pattern – if the share price has been on the rise, then there seems to be a plateau in the price, then this says something. It is either a short price correction before the rise resumes or the bulls are exhausted and the reverse is looming. What will distinguish the two scenarios is trading volume and technical indicators. To buy the stock, the trading volume should not decrease at this level and technical indicators should hint to a price rise like showing oversold conditions and not overbought conditions at all.
- Bottom-out pattern – if the share price has been falling and then goes sideways, then this is a good place to buy the penny stock. To resolve to buy such a stock, the trading volume should be increasing and technical indicators should show an oversold condition.
- Price gap-ups – the stock price is opening higher than the previous close. This is a strong hint that the stock price is growing. Coupled with what technical indicators say, then you would consider buying such a stock. Technical indicators should indicate anything bullish for you to buy.
Yes, you can definitely make money trading penny stocks. Here are tips to increase your income:
- Trade but don’t invest in penny stocks – thing is, you are not sure about the company. So do not hold penny stocks for long. Keep tracking to exit after small profits.
- Utilize small spikes – penny stocks will sometimes spike before falling again. Those small moves occur for your good, so buy shortly and exit as the spike proceed.
There you go. Start making money with penny stocks.