How to Invest in Penny Stocks

What are Penny Stocks?

Penny stocks are company shares that trade for less than $5. Most of these companies are highly-rated for small-time traders or new investors in the stock industry. These stocks were less than $1 some years back, but now their minimal value increased to $5.

Buyers can find some of these stocks on leading stock market platforms, including the New York Stock Exchange (NYSE), but they all trade with over the counter (OTC) platforms.

You can also invest in these penny stocks with privately-owned OTC Market Groups that grant minor ownership in these stocks. Note that the prices for these penny stocks vary for each country.

 For instance, the minimal stock value is $5 in the U.S., but the U.K has penny stocks worth £1. These penny stocks usually have a market capitalization limit according to your location. The U.S. has a $250 to $300 million limit for these penny stocks.

The U.S. Securities and Exchange Commission (SEC) defines penny stocks as ownership in companies selling their shares for less than $5. These shares may also include claims from companies that may be inactive in the trading market.

These stocks are the smaller chunks of the market, allowing almost anyone to invest businesses for dividends and trading profits.

List of Penny Stocks

Following are the top penny stocks that you should check for your next penny stock investment.

  • Banco Bradesco S.A. (BBD)
  • Grab Holdings Limited (GRAB)
  • DiDi Global Inc. (DIDI)
  • Tencent Music Entertainment Group (TME)
  •  iQIYI, Inc. (IQ)
  •  RLX Technology Inc. (RLX)
  •  New Oriental Education & Technology Group Inc. (EDU)
  • Zhihu Inc. (ZH)
  • VEON Ltd. (VEON)
  • Exela Technologies, Inc. (XELA)

Are Penny Stocks a Smart Investment?

Penny stocks have been an essential part of the stock market, considering many people invest their money in them. Many movies in Hollywood have also highlighted the potential of these stocks through their structured storytelling. The question is, are penny stocks a smart investment? 

There is much disagreement when it comes to investments in penny stocks. These penny stocks usually belong to troubled companies, which may or may not soar up in the future.

In addition, many fraud cases with these penny stocks register, where companies use the classic pump and dump scheme to lure investors in and then pull out their investments.

In certain cases, companies spread false information about their stocks, discuss their future potential, and make big promises to reel in new investors. However, most of these claims are not valid.

Dealers hype particular stocks, affecting market trends as everyone starts investing in the stocks only to learn that they don’t yield sufficient profits.

Anyone still holding the stocks ends up losing almost all their money. So, should one stay away from penny stocks?  Well, not necessarily.

You can easily find many penny stocks with good market value and prospects. Many of these penny stocks offer potential and can even help you earn significant profits from the stock market. 

Nevertheless, it is essential to know the market trends, penny stock risks, and various factors to reap the full benefits of penny stocks (more on this ahead).

How to Find Penny Stocks?

Penny stocks have their risks, but there are ways to invest in them if you still want to do so. However, trading on major stock exchanges requires more than just money in your pocket, and investors need to meet multiple listing requirements before investing.

For instance, if you plan to invest through NASDAQ, you have to maintain a minimum bidding price of $1 according to Nasdaq Rule 5550(a).

Investors can access stocks that valued less than $1 through the OTC bulletin board and the pink sheets. Note that the pink sheets are a risky penny stocks investment since they are unavailable at the SEC.

Selecting a Penny Stock Broker

Investors need a stockbroker when they want to buy penny stocks, but the broker fee is a significant concern. It is best to stay away from stockbrokers that charge per stock, as you will lose a great sum through these kinds of payments.

Try to find someone who charges a flat fee as you can make a one-time payment and earn profits from the stocks.

In addition, the broker’s experience and expertise are essential considerations before investing in penny stocks.

Additional Charges

One of the biggest concerns for penny stock investors is the additional charges they have to pay. A transaction fee is an excellent example because penny stocks have a lower value than higher market stocks.

Consider buying a penny stock for $0.10 and expecting the stock to double after some time. Your profits will effectively reduce, although one might assume good gains from a price increase to $0.20. It would be best to go through the broker fee charges and structure before making a final decision.

How to Find Penny Stocks Before They Explode?

Penny stocks are highly volatile, and penny stock investors need to have a clear strategy. It is challenging to know when the market changes, but there are some signs you should lookout for. These include the following:

Look for the Hype

Penny stocks have high volatility because of their low share prices. Minor changes in the market trends can significantly impact their collective price. Keeping a closer eye on the market hype can help you determine if you should pump or dump your penny stocks.

For instance, if a celebrity invests in a penny stock, it will increase its value. Understand the difference between actual news and social media buzz because social media buzz can help create organic growth. However, the local news stories can fade out quickly.

Watch the Trading Volume

The trading volume of a penny stock over a long period can help you determine its possible future. Try to look at a six-month or annual window, as it will provide you with a baseline for the penny stock performance.

 An increase in the trading volume represents positive changes because more volume means more penny stock investment. If people sell their stocks collectively, do not invest in that penny stock.

Recent Moves and Changes

Top percentage gainers could mean that the penny stock prices could increase soon. Try to invest in the penny stock during the first or second wave of the stock purchase. It will help you stay financially stable and earn more dividends or trading profits.

How do Penny Stocks Work?

Penny stocks work precisely like any other stock options in the market but have a higher risk factor. These stocks usually have low market volume and come with digital dealing options as they do not have the floor on the primary market. Brokers working with penny stocks offer discounts on dealing with them in hopes of picking the right penny stocks and earning more.

The penny stocks are hazardous because they are not a part of the mainstream market, and investors do not have sufficient market information, so their investments are less liquid. Every stock has its risk, but penny stocks are arguably the riskiest ones.

 Making good trading moves because of little information can complicate things. What makes things even more difficult is that the info available does is not credible because the penny stocks are not registered register with the SEC.

Nevertheless, penny stocks are a good investment option for those who understand their risks. It is essential to assess each price-changing factor individually before making a final decision.

How to Make Money on Penny Stocks?

Making money with penny stocks can be a little tricky compared to other stocks in the market. These stocks have low liquidity, smaller volume availability, and a shorter buyer base. Investors can still make money despite all these risks with the right strategy. Here is a breakdown of some essentials you should follow if you want to make money with penny stocks.

Highlighting Patterns

Penny stocks follow a pattern, but these patterns form after a long interval of consistent price. The trend can decrease over multiple months and go sideways for a few weeks. A conjunction between the sideway trend and a market surge promises good price recovery and can help investors make money on penny stocks. 

Price Dips

Finding penny stock investors is very difficult and requires dealing with volatility because of an even split between buyers. The share price can dip if the sellers increase compared to the penny stock buyers. A stock that drops in value quickly without any reason could represent a dip pattern, which is the perfect investment opportunity.

Investors buying penny stocks on the lowest section of the dip trend will get better profits because even a minimal change in the prices will help earn more profits.

Top out Pattern

A top-out pattern is the exact opposite of the price dips mentioned earlier. It is when shares keep climbing and then start following a sideways trend in the market. The sideways movement is usually a short break in the market trend before the stock increases in value. However, penny stocks typically experience a dip after these market changes. Selling at the highest of the top out pattern can help earn money on penny stocks.

Share Consolidation

Share consolidation is when a company increases its stock value by merging stocks, and it is when the stockholders turn over and represent a possible price increase. That said, investors with little patience can get frustrated and may want to sell their stock. 

The penny stock usually tracks sideways until it starts increasing in price, and the sellers keep pulling out until only a small group of investors are left. The next stock move impacts the price considerably, and selling on increased stock value becomes easier.

How to Day Trade Penny Stocks?

Significant price changes with penny stocks hardly happen, so investors need to focus on day trading on same-day trading. Following are some steps to ensure you trade at the right time.

Ignore Success Stories

Penny stock investors come across many success stories related to penny stocks. However, they must learn to say no because most of these stories are either lies or plain luck. These penny stocks are volatile, so it is not safe to trust them with your hard-earned money.

Keep an eye on the Warnings

Most penny stock investors sell their stocks more than they buy them because most newsletters, social media accounts, influencers, and other sources of information do not tell the truth. They want maximum people to invest their money in stocks to boost their market value, but it doesn’t work.

How to Avoid Penny Stock Scams

Penny stocks have many risks involved, and it is essential to know how to avoid penny stocks scams before making any decisions. Here are some tips that every investor must consider

Avoid Unregistered Brokers

Many unregistered brokers claim to provide services for a smaller fee, but it is best to avoid them. A lot of these brokers are not credible and could run away with your investments.

Re-evaluate Hot Market Trends

It is easy to get caught in penny stock hype as everyone starts rushing to a particular stock, increasing its price. For instance, many people use the blockchain industry for marketing penny stock investments.

Stay Realistic

Investing in penny stocks requires maintaining a realistic outlook toward your investment. It is best to avoid overpitching your money because a single spike or drop in the prices could make you lose your money.

Bottom Line

Investing in penny stocks can be quite risky, but those who understand the market trends should invest in them as much as possible. That said, you must perform thorough research before hiring a broker or choosing a penny stock to invest in and ensure you spend your money in the right penny stock.