Penny stocks are infamous for having a shady stigma. And because of that tainted brand, some consider them to have a bad reputation. Most traders usually see them as low-quality trades associated with high risk and high volatility. However, it’s a little harsh considering that’s not always the case. The definition of a penny stock is when a company’s ticker trades under $5 per share. Likewise, there are good reputable companies that are considered to be penny stocks with legitimate reasons as to why their stock is trading at such a low dollar per share.
A small, up-and-coming company could have undergone the initial public offering (IPO) process, becoming available to the general public for the very first time. It’s also possible that a company’s gone through a stock split, breaking up their shares into lower-priced shares. Or a company’s going through a plethora of changes internally and has taken a beating in the market. Whatever the case may be, there could be many reasons why a stock is considered a penny stock. So let’s get into what you need to know when it comes to penny stocks so you can trade with confidence.
Should You Invest in Penny Stocks?
Investing can be a scary thing for anyone, especially in times of uncertainty and volatility. But, here at Simpler Trading, we have you covered as we offer our Director of Stocks, TG Watkin’s, very own Moxie Indicator™ Mastery. Sign up today and get immediate access to weekly interactive trading sessions geared specifically towards stocks. You’ll also get real-time trade alerts, and TG’s trade spreadsheet, so you can follow along even if you miss a live session.
Can Penny Stocks Make You Rich?
Penny stocks have always been a fascination with new traders. The price point, the opportunity, and the potential can be very tempting ways to trade. But, if traders aren’t careful, all the opportunities and potential a portfolio can have with penny stocks, can become hindered with mistakes and trading losses.
The question still remains: can penny stocks make you rich? And the answer is most likely not. There’s no shortcut or get-rich-quick scheme when it comes to penny stocks or trading for that matter. But, if done right, it can offer a great way to find growth in stocks and the ability to trade for a living.
Below you’ll find a comprehensive list of some of the best trading indicators to use for penny stocks. Again, these are tools that can assist in helping you make decisions within your trading journey. They aren’t a get-rich-quick indicator, and every position will need to be researched thoroughly for you to have a chance to profit.
Video Guide To Scan Stocks
Best Penny Stock Indicators:
- Moxie Indicator – the Moxie Indicator is a momentum-based indicator that reveals the internal strength of the market for a particular position. This can greatly help a trader read a stock’s profit potential and identify entry and exit points.
- Ichimoku Cloud – the cloud is a momentum-based indicator that can help a trader identify support and resistance levels in stocks.
- Relative Strength Index (RSI) – This is also a momentum-based indicator that helps a trader know if a stock has been oversold and overbought. With penny stocks being volatile in many cases, this indicator can be a great tool to use in the market.
Do Penny Stocks Ever Go Up?
Penny stocks can trend up, down, and sideways, just like any other blue-chip stock. Penny stocks tend to be more volatile. And depending on the reason and why it’s affected positively or negatively relies on many factors. Below you’ll find some of the reasons why a stock goes up, down, or sideways.
How Penny Stocks Can Go UP:
- Good earnings report
- The company is in demand
- Great business structure
How Penny Stocks Can Go Down:
- Bad earnings report
- The company is struggling to become relevant
- Taking on debt
- Bad business structure
Of course, these are just some of the reasons that make a penny stock go up or down, but they are the major reasons that traders need to pay attention to. Things like geopolitical wars and pandemics are never predictable. So granted, those things aren’t considered until they happen.
Are Penny Stocks the Right Trade For You?
The only way you can adequately answer this question is by finding a trading strategy that works for you. For a trading plan, you should define the indicators you’ll use, the time frame you’ll trade, and your risk parameters. That’s where the Moxie Indicator Mastery that we mentioned earlier can come in handy. When you become a Mastery member you don’t have to trade alone and can receive continued trading guidance from a professional.
How to Pick Penny Stocks?
Many traders think penny stocks are great picks solely because of their affordable price points. However, that can be a dangerous way of thinking for your portfolio. Simply for the fact that what’s affordable today can be a lot more than you bargained for tomorrow. But nonetheless some of the ways to pick a viable penny stock we’ve listed below.
Researching a company will be one of the most important things you can do when it comes to picking penny stocks. And, in this step, you’ll have to get analytical and technical. For instance, looking at the financials and charts of the company will be your best bet. It’ll help you understand your future trade and whether it’s viable.
Understand the Difference between OTC and the NYSE
The New York Stock Exchange (NYSE) is the United States major financial market where every major company trades. Every single company on the NYSE is regulated by the SEC and they’re required to fully divulge their financials publicly. This allows traders to conduct research and to decide on stocks.
The other market is called over-the-counter (OTC) where many penny stocks are listed as pink sheets that trade on the OTC. Pink Sheet companies don’t have to make their financials public to traders. Oftentimes traders will be in the dark when it comes to the analytic side of research when it comes to a pink sheet company. Pink sheet companies usually have low liquidity which gives traders issues when determining accurate price points. And finally, pink sheet companies aren’t as regulated by the SEC. Pink sheet stocks don’t have to adhere to rules and compliance as strictly as companies operating on the NYSE.
Understand Your Risk Tolerance
Penny stocks are a lot more volatile than your standard blue-chip stocks, so understanding your risk is crucial to your portfolio. You’ll see many swings throughout the day (high and low). But with patience, a willingness to learn the stock, and having a clear understanding of your risk threshold, penny stocks can be a viable way to profit. However, if the thought of trend lines going up and down makes you nervous, you may want to reconsider.
Understand Your Position Size
With penny stocks, you’ll see stocks under $5 per share, so shelling out thousands of dollars to get hundreds of shares might be a tempting thought. More shares could mean more profit, but it could also mean the exact opposite. So trade what you can afford to lose and don’t go outside of that circle. Rate your setups accordingly and if it’s a good setup determine what your position size is from there to maximize your position. Never bet your whole account on one stock.
Trade Penny Stocks with a Professional
Professionals like to trade with viable and legitimate stocks, sometimes those stocks are under $5 per share, and thus they’re considered penny stocks. No good trade should be judged primarily on its price points. And that’s why TG likes to trade stocks that are under $5 per share. To do so he looks for good viable trades by conducting his research and ensuring that the trade falls within his risk tolerance. He makes sure the stock is in line with his ideal structure and that his setup is in coordination with his trade, then he positions his sizing according to his setup.
If you need a little more help and want to see TG trade in action, sign up for his Moxie Indicator Mastery. You get actionable trade alerts on Moxie Stocks without wasting time or capital. You’ll also enjoy weekly interactive live-trading sessions, exclusive informational downloads, and TG’s very own trade spreadsheet.
FAQs on Penny Stocks
Q: Are penny stocks good for day trading?
A: Day trading can be a viable strategy with penny stocks. But conducting research both technically and analytically is the key. You’ll have to rely on your technical setups to have a chance. Day trading penny stocks is not for the faint at heart. With high volatility, you may want to test the waters with paper trading before you fully commit.
Q: Can you make $500 a day trading stocks?
A: $500 a day isn’t an unreasonable amount to make on a daily basis, however, you need to be committed and you need to have a solid trading plan to reach that potential.
Q: Are there any downsides to penny stocks?
A: Penny stocks tend to be riskier and depending on if you’re trading them on the NYSE or the OTC markets can make a huge difference. The NYSE has a lot more compliance and regulations that penny stocks have to follow. Penny stocks that trade on the OTC have a lot fewer restrictions and requirements to follow. So traders aren’t as protected if they stray anywhere else besides the NYSE.