It is in our nature to look for bargains, and when it comes to low prices in stocks, nothing beats penny stocks. That is because penny stocks are defined by their low price per share. However, beginners in the stock trading world might lose a lot of money by taking the wrong position.
Penny stocks are good for beginners as long as they hold small positions because their limited liquidity and volatile price hikes can serve as excellent training for the broader stock market. While beginner’s luck can strike in penny stocks, it is advisable not to bet too much on luck.
In this article, you will learn more about penny stocks, like what makes them different, the top mistakes you might make when you start trading these stocks, and how much money you can make trading penny stocks.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Makes Penny Stocks Different?
Penny stocks, as the name roughly references, are stocks that trade for pennies. It is even possible to get multiple shares for a penny. In contrast, you can expect to pay fifty dollars on average for regular well-performing stock. This difference gives penny stocks their unique set of advantages and disadvantages.
Brokers get the best in the penny stocks world because they have to increase their persuasion and selling-charm when persuading buyers to get onboard.
Penny stocks are different because they’re mostly illiquid, and very few buyers exist for the stock you might own. However, this isn’t the case with penny stocks that are on the rise and are covered in niche media like penny-stock newsletters.
The world of penny stock trading involves much more price-manipulations than the world of broader stock trading. That is why you can make money in penny stocks if you understand how the more prominent players are making money and align yourself with them.
For instance, a newsletter writer might be paid in penny stocks with a lockup period to write a glowing stock review. You can make a small profit by day trading that stock with a margin account so you can sell quickly and make a few dollars before the newsletter’s author dumps his stock.
Top Five Mistakes Beginners Make With Penny Stocks
Even though penny stocks can be beneficial to beginners because of their educational value and a low price-point, the reason most beginners must stay away from them is the impulse control and cognitive biases they’re prone to. Below are the top five mistakes you should avoid.
Not Doing Research
Remember that stock trading without data is like gambling. And gambling is the worst thing to do with penny stocks. While Tesla and Facebook stocks might have a great swing even for inexperienced traders, penny stocks rarely have those kinds of price-movements.
Therefore, buying penny stocks without research is like purchasing a four-dollar lottery ticket with a prize worth five dollars. A large-quantity play will almost always leave you in the hole.
Not Having a Mentor
The fascinating thing about penny stocks is that some people are making hundreds of thousands of dollars every year buying and selling them. However, these are experienced traders who have oriented their entire trading patterns and holding practices to match the world of highly-speculative limited-liquidity trading.
When you have someone like that as a mentor, you are on the side of those who make money in the penny stocks game. And if you trade without someone guiding you, you’re against those same players. This can further drive down the odds of your success in trading penny stocks.
Being Too Cautious
Earlier, you were given the example of buying a four-dollar lottery ticket to win a five-dollar prize. That can be done with research and strategy, but if you’re too cautious and end up winning, the fact remains that you gained a dollar when you could have scaled your returns by taking a larger position.
Beginners can get too cautious and make a trade only to realize they could have made much more. As a result, they overcorrect and take massive positions (sometimes while being highly leveraged). These positions can end up leading to a loss because there is no strategy being the trade. Such a loss can either scare the trader away from penny stocks or push him into a risk-averse trading volume.
This zig-zag between large and small positions isn’t too uncommon in penny stocks and is almost always fuelled by taking a tiny position on a winning trade. Ensure you research your potential positions well and then make a trade worth your time. This keeps you from overcorrecting because of regret.
Ignoring Your Gut
Our intuition is governed by thousands of years of fine-tuning. While your experience in stocks might be limited, your ability to tell whether someone is sincere, authentic, or honest is reliable. Take your gut’s judgment about people and their intentions as valid. If a broker seems like he is mainly after the commission, you do not need to rely on him. If a mentor seems like he is faking experience, do further research.
Not Sticking to a Strategy
Penny stock traders who find mentors early on often take their advice for granted. This is also true for beginners who receive guidance from brokers. As a result, they end up executing as one-offs. When you trade penny-stocks without a strategy, you’re likely to make trades on a whim and give in to the gambler’s fallacy.
If you lose money buying a lousy class of penny stocks, you may hold the position, hoping it will come back up. While most standard stocks that swing-traders flock around experience such eventual highs, a penny stock might just become completely illiquid.
Therefore, you must have a strategy. When someone with the right approach guides you, you should stick to the overarching plan instead of trying to exit too quickly or take an unnecessary detour based on fantasy rather than experience.
How Much Money Can One Make in Penny Stocks?
One can potentially make over ten thousand dollars on a single trade if a trade works out. However, the chances of a trade working out precisely as you thought it would are near zero. Most penny stocks that see a 50% rise in value are artificially pumped by various factors, including insiders buying large quantities of their own stock to increase the price.
If you rely on a mentor who understands when something like this is happening and gets in on the action early, you can eventually earn enough money to graduate to trading higher-priced stocks.
How Much Time Does It Take to Learn About Penny Stocks?
By now, you have learned that there is significant money in penny stocks, but one must have the right guidance to become a profitable trader in the niche. You may be wondering if you can become an expert instead of needing one.
It is possible to learn about penny stocks with a year of experience and slow-consumption of strategy videos and courses on penny stocks. Trying to become an expert too quickly will lead you to a path of losses and regret. Give yourself a year before you start making some real money, and you’ll thank yourself for all the years that follow.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
When it comes to trading penny stocks, there is a lot of noise in the market. Some prejudge penny stocks to be inherently bad while others make significant money trading them daily. The truth is that it all comes down to experience. If you initially align with a mentor who has the experience and eventually become the expert yourself, you can make a lot of money in penny stocks.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
