- What is a penny stock?
- How to select the right penny stocks?
- How to trade penny stocks effectively?
- How to time penny stocks buy and sell decisions?
- What are the hottest penny stocks to trade?
- Are there any mega-cap companies that started as penny stocks?
What is a Penny Stock?
According to NASDAQ.com, ‘A penny stock typically sells for less than $1 a share, although it may rise to as much as $10 per share after the initial public offering, usually because of heavy promotion.
All are traded over-the-counter, many of them in the local markets of Denver, Vancouver, or Salt Lake City.’
The SEC (Securities and Exchange Commission) defines a penny stock as any stock that is trading under $5 per share. In the United Kingdom, a penny stock is defined as any stock trading under £1.
Traders generally don’t consider stocks trading around $5 on major exchanges like the NASDAQ and the NYSE to be penny stocks, but technically they are.
For the most part, these low-priced stocks are also small-cap companies. It would be disingenuous to describe penny stocks as stocks that cost a penny, because they don’t.
Yet, there are 4 categories of penny stocks to choose from, each with different price ranges. These include the following:
- Tier 1 Penny Stocks
These are the most popular penny stocks that traders select. They can be found at major exchanges such as the NASDAQ, and the NYSE. Many Tier 1 penny stocks trade at under $5 per share, but often trade above that price.
These stocks offer greater transparency to traders because they are required to provide financial reports. In that sense, they are a better option than over-the-counter penny stocks.
- Tier 2 Penny Stocks
For many traders, Tier 2 Penny Stocks are the standard. They trade at a price of $0.01 – $0.99, and many of these stocks are listed on the NASDAQ or the NYSE.
To stay listed on an exchange, Tier 2 Penny Stocks have to maintain a value of $1 or above.
- Tier 3 Penny Stocks
Tier 3 Penny Stocks trade below $0.01 per share. That means that the price begins at $0.0099. They are not listed on the NASDAQ or the NYSE, and for that reason many traders avoid them.
- Tier 4 Penny Stocks
These are known as Trip-Zero stocks. They are priced at $0.0001 – $0.009 per share. These stocks often experience huge volatility with dramatic upswings and downswings in pricing.
If a Trip-Zero stock does well, lots of profit stands to be made, or significant losses can result.
How to Select the Right Penny Stocks?
The fact of the matter is that the majority of penny stocks ultimately fail. As a trader, your job is not to develop a lasting relationship with penny stocks; it’s simply to trade them for a profit.
Day trading is the process by which you buy and sell penny stocks all within the same day. In other words, all positions are closed out by the end of the day. Selecting the right penny stocks is easier said than done.
Myriad factors can influence pricing mechanisms, noteworthy among them press releases, financial reports, media announcements, and the like.
Selecting the right penny stocks is all about putting in the work. Technical and fundamental analysis, scanning the press for valuable news tidbits, and using stocks scanners to assess valuable day trading opportunities.
The main thing to remember about penny stocks trading is that these are short-term trading opportunities. They are not investments, since the long-term viability of these stocks is negative.
Penny stocks typically trade as pink sheets or OTC (Over the Counter). Finding the right penny stocks is a matter of seeking out stocks with the highest potential of success.
That’s where stock scanners come into the picture. Day traders can input specific parameters vis-à-vis volatility, change in price, and unique trading strategies for specific stocks.
Scanners which display high trading volumes are reflective of significant price movements.
There are 3 factors which Day Traders should assess when selecting Penny Stocks to Trade:
- High Trading Volume – The greater the trading volume, the better the stock for trading purposes. This indicates significant trading liquidity for the penny stock.
- News Related Price Movements – Major news announcements can have an outsized impact on the price movements of penny stocks. This allows for significant trading opportunities for upside or downside profitability.
- Watch the Float – The smaller the float the more likely it is that share prices can rise or fall rapidly when interest spikes or wanes. If there are too many shares, it takes a lot more to pull up prices, or drop them down.
How to Trade Penny Stocks Effectively?
There are multiple tactics, strategies, and trading practices that can be employed to trade penny stocks effectively. Pattern recognition is an integral part of trading penny stocks effectively. Patterns are important in the sense that they act as indicators for when to buy or when to sell.
Top patterns to look out for include the likes of: Flat Top Breakouts, Double Bottom Patterns, Fibonacci Retracements, Bull Flag Breakouts, Flag Chart Patterns, Stair Stepper, Supernova, Snore Patterns, and Golden Cross Patterns.
Each pattern presents signals for day traders. The issue that is pertinent in all cases is the timing of trades.
How to Time Penny Stocks Buy and Sell Decisions?
Of all the trading actions available to you, none is more important than timing. The experts routinely cite timing as critical to your success as a trader. This holds true whether you are a futures trader, or a day trader.
Many novices make the mistake of assuming that day trading is about buying low and selling high. In fact, it is possible to bet against a financial instrument such as a stock by shorting the stock.
Returns can be generated in any direction, provided the right trading decision is made up front.
It’s imperative to understand when to enter a trade and when to exit a trade. To this end, the following rule holds true: Set objectives in terms of how much you want to profit from an individual trade.
Many traders stay invested in a trade for too long, ultimately watching as the market turns against them and the trade ends in a loss. Rather make small, incremental profits over time, as opposed to staying invested too long and losing everything.
Timing considerations are of paramount importance in day trading. Once you have found a stock to trade, watch price movements and automated trading resources to set take profit, and stop loss orders. It’s better to take a small hit and live to trade another day than to get burned forever.
A big problem occurs when you try to maximize gains on penny stocks that appear to be rising ad infinitum. Unfortunately, profit takers are always watching price movements and it only takes a moment for those automatic sell orders to kick in once certain price points have been reached.
What are the Hottest Penny Stocks to Trade?
The viability of penny stocks to trade depends upon many different factors. It’s important to assess the market for opportunities at the time that you’re interested in trading.
A hot penny stock today may not be a worthwhile trade tomorrow. Each of the 3 factors listed above should be assessed in terms of what penny stocks to trade.
Use tools and resources such as stock scanners or stock screeners to make selection decisions.
Having said that, several penny stocks have performed well of late, including OTCP: OZSC, OTCPK: TSNP, and OTCQX: MMNFF. Be advised that it is 100% legal to trade penny stocks on the NYSE, NASDAQ, or over-the-counter.
Do your homework when selecting penny stocks to trade. It’s not always clear, or easy to find legitimate stocks, because many of these companies don’t have much in the way of a history, or verifiable performance.
Are There Any Mega-Cap Companies That Started As Penny Stocks?
Certainly! Here are some of the most successful penny stocks in history:
- Snap Inc
- Apple Inc
- Amazon Inc
- Plug Power Inc
- Ford Motor Company
- Turtle Beach Corporation
- Advanced Micro Devices
- Monster Beverage Corporation
Make informed trades. Read as much as possible before dabbling in day trading activities.