Have you ever traded penny stocks?
If you have, you know exactly how exciting these can be. It basically all comes down to simple math. If a stock is trading around $1 or $10 or even $100 per share and it goes up by a penny, that gains is minuscule; 1% at most using the above numbers. But if a stock is already trading at just $0.01, a move in price by a single penny means that stock has increased by 100%. This is the power of penny stocks: small moves in price equate to large gains. Think about it for a minute. If you were to buy stock in a company like Apple, Inc. (AAPL), it needs to increase over $100 to see a 100% jump in price.
So how can you trade penny stocks without treating it like a lottery ticket? The simple answer is. “don’t treat penny stocks like lottery tickets.” Have a plan going into your day trading. The saying goes: Plan Your Trade and Trade Your Plan. This is no different between penny stocks and other stocks. What are considered small cap stocks or micro cap stocks have their own characteristics and can be influenced by factors like breaking penny stocks news, emotion from day traders, momentum in a given industry, political news, etc. Understanding the way the psychology of the market can impact a penny stock is key.
First you’ll need to understand how to read the market and a good Level 2 quote system or market depth system is important to have. You can download this software from your online broker or purchase it from a third party provider. The market depth shows the bid and the ask. It also shows underlying levels of trading to see how the market for a given penny stock is set up. A thinly traded penny stock generally has less market makers and wide spreads in price. A thicker market has the opposite.
Comparatively speaking, penny stocks will have a thinner market than many of the larger cap stocks. For this reason, certain penny stocks to buy or even some of the best penny stocks to buy for large gain potential are ones that have a thin market for the simple fact that thinner markets open the door for faster and higher price movement. This is why many penny stock traders choose to trade stocks that have lower floats.
We’ll get into low float penny stocks later on but just know that the float deals with supply and demand. The lower the float means that there is a lower amount of shares available to trade in the market and therefore the quicker the price can move. It’s important to pay attention to this because even though low float penny stocks can move up quickly, they can move down just as fast. So a big key to making money with penny stocks is making sure you pay attention to the market during the time you are planning to trade penny stocks. Generally speaking, experienced penny stock day traders will hold a stock position for days or even just a few minutes at times. This is because the stocks can move so aggressively.
The plan is key here because if you plan your trade around making at least 15% and the stock goes up 20%, you might want to think about taking some profit or maybe leave a little bit of the position to take advantage of any further movement. But always remember to protect your capital and protect your gains. The point of trading penny stocks is to make money. No one gets rich on Hope and no one generates wealth by taking losses or breaking even. We’re going to focus just on penny stocks in this article but it can apply to all stocks. Historically speaking, a lot of penny stock trading can be based on momentum. There are many penny stock trades that are made which have no relation to the markets overall but still produce large gains. Taking an independent approach to penny stocks can help and paying attention to online chatter can give an interesting look into what a potential trade could end up looking like.
Having a lot of buzz around a certain stock can make it one of the top penny stocks to buy now. Then again, determining the difference between buzz and promotion is important. Penny stocks involve other kinds of risk outside of general market risk. People will hire websites, newsletters, and even social media profiles to promote or “pump penny stocks”. Generally speaking, this holds its own set of risks but playing the promotion could end up showing stronger potential to profit. The large influx of attention that these promotions can trigger may actually affect the outcome and some penny stocks that don’t trade at all can quickly find themselves at the top of the most active penny stocks for a single day. Again, timing is key and knowing when to buy penny stocks and when to sell penny stocks is the difference between profiting handsomely or losing it all in the blink of an eye. We’ll get into more detail as we keep adding to our learning series on penny stock trading.