Learning how to day trade penny stocks can be advantageous, especially for beginner investors. You don’t need immense capital to start trading. Penny stocks are cheap. Unlike blue chip stocks, you can buy several thousand shares for just a few dollars and expect a desirable return on income if the stock goes up by just a few cents.
But the opposite is also true; a small drop in price translates into a huge loss. Due to limited liquidity and a huge bid-ask spread, penny stocks are highly speculative and risky. Also, the underlying companies usually have limited transparency and backing. Thorough research is key.
Every trading enthusiast must learn how to maintain a penny stock watch list and wait for their moment to enter or exit trades.
What Are Penny Stocks?
These are securities distributed by companies whose total market capitalization is below $250M. These are micro-cap or small-cap companies. Their stocks trade below $5/share (some even trade below $1 per share). Penny stocks mainly fall into two categories – OTC and major exchanges.
A powerful and tailored stock screener for day trading is an indispensable tool, enabling traders to efficiently identify optimal stocks based on specific criteria and make informed decisions.
OTC Penny Stocks
Penny stocks sold over the counter are from companies that set a $1/share cut-off value. They are highly speculative and risky because the underlying companies have zero, little or bad financial history and maybe even close to financial ruin.
The companies must store more to get their stocks priced at $1/share. Better avoid these companies if you are not risk tolerant.
Major Exchange’s Penny Stocks
On the other hand, penny stocks sold on NASDAQ or NYSE trade between $1 and $5 per share. They are still speculative but less risky than OTC penny stocks. The underlying companies adhere to firm financial requirements established by major exchanges, including keeping their stock value above $1/share and open reporting and disclosure of financial info.
These stocks are still cheap enough for those who want to go in large. They are also capable of huge intraday swings.
Dealing Penny Stocks For Beginners
You will need a trading account with a broker to start trading penny stocks. When choosing a broker, remember the ease of moving funds, commissions, and customer service.
A broker that charges a flat rate fee/trade is better. Their commissions and fees won’t eat much into your returns.
Learn How To Create A Penny Stocks Watchlist
There are many penny stocks on the markets; learn how to pick the right one. Don’t put your money in a company that will vanish overnight. Thorough research into the history of the company and its stock movements eliminates the element of gambling.
There are stock screening tools that you can use to filter stocks based on past performance and demand (shares volume), create a watchlist and monitor patterns for signs of big runs. As you watch and trade, you will get better at doing technical analysis to identify patterns and trends in stock swings.
With penny stocks, you can buy thousands of shares with little investment and make huge profits if the stock increases by just a few cents. But the opposite could also happen, leading to a complete loss. These stocks are highly volatile. A big buy or sell results in a huge price movement that could mean a good or bad day.
Liquidity is also a problem because these stocks need a considerable following. Money managers, mutual funds, or index funds do not trade them. Once you enter a position, you may get stuck there for weeks until there’s enough demand or supply to exit.
All in all, caution should be in principle when dealing with penny stocks. Be aware of the risks and how to minimize them. With thorough research and technical analysis, you will learn how to identify your favorite penny stocks for your portfolio.