Penny stocks trading has skyrocketed in popularity over the years. Therefore, if you are wondering why it is becoming popular and why you should trade it, this guide is meant for you. You will also understand what penny stocks are, how they are traded, and receive useful tips from our experts.
In this guide
What Are Penny Stocks?
Penny stocks are shares of companies that trade for low costs. Also known as micro-cap stocks, they are usually traded with amounts ranging between $0.02 to $5 per share.
Penny stocks are cheap, and that is why most new traders and investors will start their stock trading ventures with them. They are also a perfect choice for low-budget investors. What’s more, penny stocks carry low risks, especially when traded on a stock exchange. Simply put, it is a tool suitable for long-term investment, and only the most patient investors will reap the profits.
How Penny Stock Trading Works?
Penny stocks can also be traded over the counter, meaning they are not listed in stock exchanges. Note that for a stock to be listed in a world-renowned exchange market, it must be traded at above $1 per share.
Penny stocks that are traded below $1 are mostly from small companies that are new and upcoming in a particular sector or ones that are bankrupt and in danger of going out of business.
When trading penny stocks over the counter, the risks involved are much higher than trading them in a stock exchange. This is because they lack liquidity, have large market capitalisation and bid-ask spreads.
In addition, penny stocks are also highly volatile, meaning that their prices will keep fluctuating more frequently. This feature puts this asset at risk, making you track your trading activities more regularly.
How to Invest in Penny Stocks?
Now that you know what penny stocks are and the warnings attached to trading them, it is time to understand how they work. Remember, with patience, discipline, and consistency, you can make good profits with this venture. Additionally, you need to be well educated and understand the markets to trade penny stocks. Simply put, be keen and careful in your choices by following the steps below.
- Research
Any trading activity requires research, and so do penny stocks. So conduct the necessary due diligence on the companies offering penny stocks before taking the plunge. This includes confirming a company’s financial situation and if it is listed in major stock exchanges.
- Choose a Stock Penny Broker
Another element you must consider to invest in penny stocks is your choice of broker. The broker you want to invest with must be regulated in the UK market by the Financial Conduct Authority (FCA). With a bit of online research, it will be easier for you to identify the best penny stock brokers in the UK.
Online stock penny brokers have trading fees and deposit requirements. Other features also vary. Therefore, you should confirm if they are affordable to trade with and support you accordingly.
To learn more about Stock Brokers and Stock Trading Apps, please check our other guides.
- Identify the Penny Stocks to Trade
With a choice of a company offering penny stocks, you still need to identify the specific penny stocks to invest in. OTC markets have tools to help you in your decision, so take full advantage of them. Remember, you need to choose a stock penny that you are fully familiar with.
- Open a Position
Once you are confident with your choice on a penny stock, it is time to open a position. Penny stocks are most traded long-term so ensure that you have done enough research and market analysis to improve your chances of gaining from the trade.
Continue monitoring your trading activities to avoid surprises in the long run. Even though long-term investments do not require frequent activity monitoring, staying abreast of your trade’s performance is important.
Do not worry about keeping track of your activities, especially if you are hardly at home to access a desktop. Penny stock brokers also have trading apps that are easy to download and install, hence easing your overall trading capabilities.
Risk Management in Penny Stock Trading
Trading penny stocks carry the risk of losing money should a trade work out against your plan. Therefore, you need to protect your investments by utilising risk management controls. Risk management controls do not guarantee complete safety, but they help minimise the amount of losses you will incur if you do not succeed with a trade.
The first step to minimising losses trading penny stocks is staying knowledgeable. So, learn more about penny stocks and understand their market behaviours over the years. With this in mind, you will be able to quickly identify entry and exit points in a trade.
Additionally, you can apply stop-loss and take profit orders. Take profit orders are meant to stop your position when it rises to a certain level before changing direction. On the other hand, a stop-loss order will stop your trade when it reduces to a certain level that you will have chosen.
Stop-loss orders can either be standard or guaranteed. The standard stop-loss order protects your trades against extreme loss, but know that they are bound to slippage if market price performance rises. In contrast, a guaranteed stop loss is more advanced with extra features, protecting your trade regardless of any changes in the stock markets.
Read about How to Invest in Stocks UK in our other guide.
Pros and Cons of Penny Stocks Trading
Trading penny stocks carries risks, and it is important that you understand it fully to decide whether it is an activity worth a try or not. To help you with your decision, here are the significant pros and cons of penny stocks trading.
- Low Prices: Penny stocks are priced very low, making them suitable choices for experienced investors willing to diversify their portfolios without worrying about spending a lot of money.
- Growth Opportunity: Since penny stocks trading lets you invest at low costs, it has attracted new companies to join the venture. By choosing a new or upcoming company, you are creating a growth opportunity. However, without conducting due diligence, heading to the top can be an uphill climb.
- Thrilling: Investors with high-risk tolerance will enjoy penny stock trading since their share prices frequently change over short periods. The price changes are perfect to be taken advantage of and make good profits.
- Trade with different strategies: Penny stocks are highly volatile assets, and while you can trade them physically, it’s also traded as CFDs globally. This gives you the platform to try different strategies like day trading and scalping.
- Highly volatile markets and low liquidity puts penny stocks trading at high risk.
- Companies that host penny stocks rarely pay dividends. All the profits made are reinvested in their business for growth.
- Limited number of top-tier brokers offer access to penny stocks.
Conclusion
Penny stock investing is not the same as investing in traditional stocks, hence it requires a different approach and mindset. While investing in penny stocks can generate good income, it can also be disastrous and cost you money in losses.
In this case, it is essential to have a trading journal where you get to write down all your trading activities, including your moves and observations. It will be of great help for you in the future when creating strategies and can also be valuable when exploring how to trade options. You most likely won’t repeat the same mistake twice.
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One Reply to “How to Trade Penny Stocks – The Ultimate Guide”
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25,000 hours of testing 70+ brokers. Our recommended broker is Pepperstone.
Our recommended broker is Pepperstone.
I was first introduced to trading penny stocks when a brother made of around $2000 trading penny stocks! I started to learn this and at this time by trading the cheapest stocks on the market, I am able invest small amounts of money and see huge returns. Don’t be afraid, guys! A lot of beginner traders start their trading journey with penny stocks.