Trading in penny stocks can help you rake in millions of dollars—or not. This makes penny stocks trading a high-risk investment. If you want to become a millionaire from penny stocks, you need to learn the ropes, but has anyone become a millionaire from penny stocks?
Some people have become millionaires from penny stocks, but they are the first to admit it’s a risky venture hence not suitable for everyone. Making millions in penny stocks is a slow process that takes years. Also, to buy and sell these stocks at the right time, you need to trade daily.
In this article, you will learn the basics of trading in penny stocks. You will also discover what to look out for when buying these stocks, what to avoid, and how to become a successful penny stock trader.
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
Why Trade in Penny Stocks?
Penny stocks, small caps, or microcap stocks are generally small companies whose share price falls below a dollar. Also, their market capitalization is usually less than $250 million. A majority of these companies are speculative and trade over the counter (OTC market).
Since penny stocks are so volatile, they can make you very rich if you discover how to ride the wave. Besides, you can make profits with little investment since penny stocks cost, well, pennies.
In most cases, penny stocks are part of pump-and-dump scams whereby scammers accumulate a share, promote it, and then sell it off. This causes countless clueless investors to suffer massive losses. As a result, The Securities and Exchange Commission cautions penny stock investors and warns them about the possibility of losing their entire investment.
Savvy penny stock traders turn huge profits because they know how to work the inefficient market. They take short bets, long or quick trades, and make quick exits to create winning bets. Over time, they learn what to look out for and how to make money out of scammy schemes without getting involved in the techniques per se.
For instance, when penny stocks get promoted by scammers, they become volatile. Savvy penny stock investors know the right time to buy such shares, and they do so before everyone else, thus making a killing.
While trading in penny stocks can be lucrative, it’s not meant for long-term investing. It’s more of a gamble where you get to follow certain patterns that are often predictable. As such, it’s not advisable to use this investment strategy for your retirement account.
How Do You Find Good Penny Stocks?
When you are looking for good penny stocks, you want to pick stocks with a potential for high returns. To do this, you need to do your due diligence and check the fundamentals of the companies you are interested in.
Use the following criteria to find good penny stocks:
- Look out for companies below a specific share price, such as $1.
- Look out for companies below a certain size, such as $1 billion.
- Carry out a technical analysis of the firms based on trading patterns.
- Find out about the company’s products or services.
- Choose small companies that show consistent growth over the years.
- Identify small companies that show increased growth in sales over 2-3 consecutive years.
- Identify small, fast-growing companies with high profitability, low debts, and operating costs.
You could also use stock screeners to narrow down a huge list of penny stocks into a small one. Using filters based on price, performance, volatility, or chart patterns, you can select the type of stocks that meet your requirements.
Once you have chosen your preferred penny stocks, buy the shares, or follow the stocks for a while. You can also use an app to simulate trades using various stocks and strategies before making a genuine trade.
How Do You Grow Your Portfolio?
To grow your portfolio, you need to buy undervalued stocks that look promising, have a positive value, and strong financials. These make the best penny stocks.
However, finding the best penny stocks to grow your portfolio to millionaire status is not very easy. This is because:
- You might have to try hundreds of penny stocks before you get a lucky stock.
- Good volumes are difficult to get due to thin trading.
- You might be unable to hold on to the stock long enough to become a millionaire.
To become a millionaire with penny stocks, you need to master short term trading strategies, which takes time. If you are not patient, you might find it easier to buy large-cap stocks and leverage compounding to make your money in the long term.
Disadvantages of Penny Stocks Trading
Unlike the stock market, which is efficient, the small caps market is much less so. This means that penny stocks provide profit-making opportunities that you can exploit, though this is not always easy. Nevertheless, you might not want to trade in penny stocks for very long because:
- On average, penny stocks have larger price swings than large caps. This means a timing mistake can cause you to lose much more than you would when trading in large-cap stocks.
- Penny stocks cap stocks have much less investor scrutiny and transparency than large caps; thus, there’s a higher risk of fraud.
- It’s not easy to get relevant information about the company you are interested in.
- Penny stocks are open to manipulation either by large players, the market-makers, or people engaging in pump-and-dump schemes.
How to Minimize Your Risks When Trading Penny Stocks?
Here are some guidelines on how you can lower your risk and position yourself to make good money in penny stock trading:
- Understand penny stock trading. Don’t dive in and start buying penny stocks blindly. Research, watch the news, and monitor the market for events that might affect your investment.
- Avoid overtrading. Smaller trades tend to be more profitable. So, once you pick your shares, buy and sell your penny stocks at the right time. Also, learn when to take quick profits or make stops for small gains.
- Stay away from Pink Sheet stocks. Such stocks are more likely to suffer fraud or manipulation. Instead, go for reputable companies since they are less risky.
- Lookout for pump-and-dump scammers. These scammers promote certain penny stocks as the next big thing but end up duping unsuspecting investors.
- Don’t invest in low-liquidity penny stocks. You want to trade in penny stocks with high share volumes since they offer you the best opportunity to cash in.
- Trade penny stocks every day. Focus on daily trading and make money from buying and selling stocks rather than trying to make it big timing the next big hit. Over time, you’ll make a tidy sum.
- Consider diversifying your penny stocks. Buy penny stocks in different economic sectors to avoid putting all your investments in one basket. Choose about 3-4 healthy and growing sectors.
- Consider the worst-case scenario. Since there are no guarantees when trading penny stocks, make sure to only risk money you can afford to lose.
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
While investing in small caps is a risky venture, it’s one investment that can make you extremely rich in a short time. If you consider yourself a risk-taker but willing to learn what it takes to be an exceptional penny stock trader, then welcome onboard.
To make the best of penny stock trading, diversify your portfolio around a few stocks. Next, be quick to cut your losses on losing stocks. Finally, hold tight to winning stocks as you await a hefty payout.
Follow these basic guidelines, and you might earn a pile of money in the not too distant future.
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!
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