So much has been said about penny stocks and you might have heard that it is not for the faint-hearted. You may also have heard tales of paupers turned millionaires thanks to these very stocks.
Whether you are a trading veteran or a novice, you might find the concept of trading penny stocks fascinating. Before diving in headfirst, it would be best to take a moment and familiarize yourself with its intricacies.
In this comprehensive guide, you will learn how it all works to determine if it is well-suited to your trading needs. Read on to learn the benefits as well as concerns surrounding this form of trading. You’ll also find below the best penny stock trading platforms.
On this Page:
Step 1: Open a Penny Stock Trading Account
Our Criteria For Choosing The Best Penny Stock Trading Platforms
We reviewed the top trading platforms based on the following factors:
- Platform’s reputation
- Trading platform’s security features
- Specific features of the trading platform such as charting tools, indicators and educational resources
- Charges and fees
Choose one of them now to get started on penny stock trading.
1. Plus500 – Online Stocks Trading through CFDs
Founded in 2008, Plus500 is a leading CFD provider renowned for its extensive offering of over 2,000 trading instruments.
Though it only has a single trading platform, WebTrader, it is an excellent one. It is web-based and has a mobile counterpart. One of its major highlights is the intuitive design that makes it easy to use. However, the customization and research options are limited and there is no support for copy trading.
It is also renowned for its low pricing. A completely free and permanent demo account allows traders to home their skills and test trading theories. Once you start live trading, you can switch back and forth between the real and virtual accounts with a simple click. Considering that its education features are lacking, the demo account is still useful for testing trading strategies.
The service has received plenty of accolades over the years, and the majority of these are for its impressive mobile app. It is, in fact, one of the most popular penny trading tools on the App Store and Google Play. On the app, you can access all of the available penny stocks and make orders. Charting tools are great, with 100+ indicators and it is available for iOS, Android and Windows devices.
Penny stock traders will appreciate the fact that the available offerings are listed by country. Thus, focusing on specific regions is a breeze.
- Trading fees – Vary depending on asset and trade value
- Excellent mobile app
- Penny stocks listed by regions making it easy to narrow down your search
- Extensive offering of tradable instruments
- Limited tools for research, education and customization
2. Tradestation – Best for Frequent Traders
Tradestation, a subsidiary of Monex Group, traces its roots as far back as 1982. As a leader in trading technology, it offers an impressive trading platform for advanced traders.
What makes it a great choice for active penny stock traders is its commission-free model for trades of up to 10,000 shares. This applies when trading penny stocks under its TS Go and TS Select pricing plans.
It also has plenty of research tools to offer as well as great analytics capabilities. High customization abilities for the tools take the convenience a notch higher.
With regard to execution, Tradestation offers excellent speeds, which translates to flawless performance. The stability of the platform and the fact that it has minimal downtime makes it easy to buy up penny stocks and assess the risks immediately.
To help you mitigate the risks when selecting penny stocks, it has highly intuitive market screening tools.
- Trading fees - $0 up to 10,000 shares, $0.001 per share for subsequent shares
- Intuitive market screeners
- Excellent execution speed
- Commission-free model for up to 10,000 shares
- For active traders the 10,000 share cap for free penny stock trading is quite low
Features to Look for When Choosing a Penny Stock Trading Platform
Considering the fact that penny stock trading is a short-term mode of trade, there will be plenty of trades to carry out. The costs, however low, eventually add up.
Penny stock trading requires extensive use of research, charting and stock screening tools. For newbies, it also requires an extensive education offering.
iii) Ease of Use
A platform with an intuitive design spares you the unnecessary hassle of learning to use it while also learning to trade.
When it comes to the order execution quality and trade execution speeds, you need a platform that offers flawless performance.
Tradestation takes the day in this regard.
Step 2: Learn How the Penny Stock Trading Market Works
- What is Penny Stock Trading?
A penny stock refers to the stock of a small company that trades for below $5 per share. In the past, it referred to all stocks trading below $1 a share, but the US Securities and Exchange Commission modified the meaning of the term to encompass all shares under $5.
Startups and small companies usually issue stocks to raise capital and grow their business. Like all other stocks, penny stocks are created through Initial Public Offerings (IPOs).
Even though there are some penny stocks that trade on such large exchanges like NASDAQ or the NYSE, a majority do not trade on the major exchanges. This is because major exchanges have minimum listing requirements for the companies that can trade on them. One of these requirements is a minimum share price.
For instance, a company whose shares fail to maintain a minimum of $1 closing bid price per share over a span of 180 days gets delisted from NASDAQ. Consequently, a majority of these stocks trade on the over-the-counter (OTC) market.
Companies floating penny stocks should file with the relevant securities authority and state that their offering qualifies for a registration exemption. Once the request is approved, the stock can start trading on the OTC market.
- How does Penny Stock Trading Work?
Penny stock trading also goes by the term pennystocking. However, it is not simply a matter of buying and selling low price stocks. Rather, it has its own unique trading style.
First, transactions on the OTC market take place on the FINRA OTC Bulletin Board (OTCBB) or on Pink Sheets, which have private ownership. Quotations take place electronically and there are no trading floors.
Second, pennystocking bears a close relationship with price movements. Thus, it heavily relies on charting.
Another unique aspect of this type of trading is that most investors do not hold these assets long-term. Instead, they try to make gains from short-term price movements in volatile market conditions.
You can either buy them hoping that the price will increase and that you will get a chance to sell them at a profit. Alternatively, you can short-sell them, investing in hopes that prices will decrease and that you will profit from the drop. In the latter case, you borrow stocks worth the desired investment amount and then sell them when prices drop. Though profits from individual trades might be small, they usually add up with time.
Penny stocks are unlike any other stocks as they typically involve small companies that are neither stable nor established. Some are new, while others are operating in a sector that is up and coming. Still, others are in danger of closing down.
For the simple fact that they are not listed on mainstream exchanges, they do not have to make the same SEC filings that bigger players do. So you have to do your own research and figure things out yourself. Finding credible information about the potential of a company to survive and thrive is one of the biggest hurdles. Once you overcome this, you might very well make a success of pennystocking.
- Penny Stock Trading – High Risk, High Reward Venture
A good number of beginner investors consider penny stocks to be their first logical stop. To a great extent, this has to do with low share prices. The idea of investing a few cents in a company and reaping substantial profits when the price hits multi-dollar levels is after all alluring. For a small invested capital, such an investor can hold thousands of shares, which could translate into huge percentage returns.
However, the reverse can also apply. Some penny stocks are in fact highly speculative for a number of reasons such as low liquidity, limited disclosure, small market caps and large bid-ask spreads. Furthermore, some of these micro- or small-cap companies either have a bad financial history or have none at all. Others are close to bankruptcy.
To illustrate how these factors could affect your trading performance, think about low liquidity. You could get stuck in an undesirable position for a number of days, even weeks. You would then need to wait until supply or demand gets to the required level to close your trade position.
Another feature of penny stocks is that they typically have high volatility. This is typical of stocks with low sell prices as they have significant room for upside. As such, they hold a relatively high reward potential. On the other hand, blue-chip companies have an established history of operating profitably while handling downturns. They thus have more stable and reliable price movements.
Based on the above factors, the asset class is considered suitable for investors with high-risk tolerance. However, in much the same way as the returns may be small, your losses can also be small. You are under no obligation to take big risks. When you take small positions, you can avoid huge risks and huge losses.
Assets for Penny Stock Trading
There are a number of tradable assets that offer an opportunity for pennystocking. These include:
Benefits of Penny Stock Trading
As you may have realized by now, pennystocking comes with considerable risks, but it also offers a number of remarkable risks. These include:
- Low Per Share Price
A good number of penny stock traders start out with small investment amounts. In such cases, they could opt to get hundreds or thousands of shares of penny stocks instead of four or five shares in a blue-chip company. If their choice works out, they can turn their small investment into so much more.
- Quick Returns
Due to the volatility of the market, a good number of penny stocks experience rapid price movements. In a matter of days, such big moves could turn into a handsome profit.
- Potential for Growth
Some micro-cap companies grow to become mid-cap or even bigger. Their stocks may then multiply several times over in value. When such companies grow to become dominant industry players, early investors get the most profits.
- Opportunity to Diversify
Since these stocks sell for very low prices, you can make investments in multiple companies simultaneously. With such a diversified portfolio, it becomes easier to balance the risks and rewards of this form of trading.
- Easy Accessibility
Penny stocks are common shares so they are easily accessible to the public for purchase. This is rarely the case for blue-chip companies, which may have more stringent criteria for initial access.
Step 3: Learn Penny Stock Trading Tips
i) Start with Paper Trading: One of the best ways to avoid mistakes is by practicing how to trade with paper trading. It simply requires a pen and paper to help you monitor imaginary trades in select real-life stocks using imaginary cash. Doing so for a few months before starting actual trading will teach you vital skills.
For instance, you will learn important trading lingo and figure out what to look for when looking for the next winner. You will obviously make mistakes, and from these, you will learn what to do and what not to do next time.
ii) Buy What You Know: There is an obvious advantage that comes with investing in a sector that is familiar to you. If you are an IT guru, consider investing in technology companies. If you work in the pharmaceutical industry, consider investing in pharma stocks. Focusing on the industry you understand best will make trading a lot less tedious.
By all means, avoid investing in the hottest industry that happens to be on everyone’s lips. Chances are if everyone is talking about it, it is almost turning from current to former fad. When this happens, stocks will collapse.
iii) Use Screening Tools: Screening tools have handy filters that let you trim down your penny stocks list based on industry, share price and other features. This will give you a suitable shortlist where you can now find the best candidates.
iv) Choose Quality Stocks: Penny stock companies vary significantly in their worth. Take time to seek out the ones whose managers are experienced and who have exited previous companies successfully. If your key focus is low price, try to find fallen angels at the end of bearish trends. A household name like Citigroup was trading for less than a dollar in March 2009.
v) Check Trading Volumes and Liquidity: Once you have successfully invested in a viable penny stock, you will at some point want to sell the shares. Being a short-term market, this will happen sooner rather than later. To do so, you will require sufficient trading volumes and liquidity. If you fail to take that into consideration, you might very well end up with paper profits that you cannot convert into real ones. Wide bid-ask spreads and few buyers are a penny stock trader’s worst combo.
vi) Always Know When to Exit: Penny stocks are rarely long-term investments to buy and hold. Knowing when to sell is as important as knowing when to buy. If you have already notched a considerable gain in a short span of time, book it now instead of waiting for a future price explosion that may never happen.
vii) Protect Your Portfolio: There are two important steps to protecting your portfolio. First, limit your holdings despite the excitement you might feel towards your favorite stock. Making it no more than one or two percent of the total portfolio will help you cap possible losses. Second, diversify your penny stock holdings. Make sure that the total value is between five and ten percent of your overall trading portfolio.
Penny stocks have over the years generated a lot of excitement and controversy due to their high potential for profitability. Depending on your risk tolerance, you may have come to the conclusion that they are ideal for you. You also now know the importance of thorough research before investing in any penny stock.
All that remains now is to pick out the most suitable trading platform for your needs and get started. After you get started, remember to stick with the process and give yourself time to grow.
Glossary of Stocks Terms
A stock is a representation of a company’s equity. When a company wants to raise capital, it issues stocks to the public. It is the aggregation of the total stocks owned by one individual that inform their shareholding of the company.
A share is an indivisible unit of capital that expresses the ownership relationship between a shareholder and a particular company, mutual fund, REITs or limited partnership. A share indicates a portion of ownership (claim) that one has on a company or fund.
Dividend refers to the portion of the company’s profits that is distributed to its stockholders. It can be on a quarterly or annual basis.
A bull market is an economic condition where the stock markets are in an extended period of consistent increase in stock prices.
A stock market is said to be bearish if it is involved in extended periods of continuous price decrease of the stock prices.
A stock exchange is an institution or a platform where shares and stocks and a host of other money market instruments are traded.
The return on investment is the profit you make from trading in or investing in shares and stocks of a particular company. It often comes from selling the investment at a higher price than was originally bought or benefiting from dividends and other profit-sharing schemes as a result of owning and holding onto a particular investment.
A broker may be a person or entity that engages in the buying and selling of different types of investments on behalf of other individuals or entities at a fee (or commission).
Day Trading is the practice of buying a money market investment product and selling it as soon it reports price increase or loss, within the same day. Traders engaged in day trading are referred to as “day traders” or “active traders”
Arbitrage is the act of buying and selling security at different stock exchanges or markets with varying prices. If, for instance, stock ABC sells at $11 on one exchange and $11.75 on the other, arbitraging involves buying from at the low price exchange and profiting by selling it at the higher-priced exchange.
A stock index is a statistical measure of the change in the stock and securities market. It comprises a hypothetical portfolio of different companies whose change in prices is calculated to determine market performance.
The Initial Public Offering refers to the sale of company stock to the public for the first time. It is the act of taking a company public and is highly regulated by such financial regulators like the SEC in the USA and FCA in the UK.
Options are derivative financial instruments whose price is based on the value of their underlying tradable security like shares and stocks. They are contracts that give the holder an option to buy or sell the underlying asset at a later date. Unlike futures, an options contract holder has the choice to buy/sell or not.
This is an options contract that gives the holder an option to buy the underlying asset before the expiry date.
This option gives its holder the choice of selling the underlying asset before its expiry date
A mutual fund refers to a company that pools funds from different investors and invests these funds in stocks, bonds, and other financial market securities. They then distribute the capital gains from these invests to their members.
The process through which stocks for companies that are not listed with accredited stock exchanges like the NYSE are traded. It is a broker-dealer network for unlisted stocks for companies that do not meet listing requirements set by the organized exchanges.
A stock is said to be overbought if it is traded excessively over a short period of time and at unjustifiably high prices.
A stock is said to be oversold if it is consistently traded below its true value.
Also referred to as the offer or asking price, this refers to the lowest price that the seller will take for a stock.
Bid price refers to the maximum price that a buyer is willing to pay for a stock.
In the stock trading context, Volume refers to the number of shares that change hands within a given period of time, be it a day, month or annually. It is trading/investment indicator where rising trade volumes point to a healthy stock while dwindling volumes are indicators of investor pessimism towards a stock.
Refers to the statistical measure of the change in price of a stock over a given period of time. It is a measure of the rate and the time it takes for a stock price to move from high to low and how long it remains within a certain price range. The higher the volatility, the higher the risk.
This refers to the highest closing price recorded by a given stock in the last 52 weeks.
This refers to the lowest closing price that a particular stock recorded in the last 52 weeks.
The bid-ask spread refers to the difference between the lowest price that a seller is willing to take for their stock and the highest price that a buyer is willing pay for the stock. It is the difference between the quoted ask and bid prices.
A market order is an instruction by an investor to the broker or brokerage platform asking them to buy/sell a stock or any other security at the best price available at that moment. It is often issued when an investor wishes to enter or exit the market quickly and at the prevailing rates.
A limit order is an order that triggers a sale or buy when a predetermined or better price is met. For a buy limit order, the buy order is executed once the set limit price or a better price is triggered. The sell limit order on the hand triggers the sale of stocks if the limit price or better price is hit.
Also referred to as a stop loss order, it is an order that triggers a buy or sell action once a predetermined price level is hit. It is designed to help you minimize possible loss on a given trade should the markets move against your bet.
Take profit is a type of limit order dictating the price level at which the broker or brokerage platform is to close a trade for profit.
Capital gain refers to the value rise of a tradable financial instrument that makes its selling price higher than the buying price. It can also be referred to as the profit realized from liquidating a capital investment like stocks.
An ETF is a collection of many tradable instruments like bonds, stocks, and commodities. These are listed on the exchanges and traded like ordinary stocks.
The debt-to-equity (D/E) ratio is a financial ration tool used to measure the financial health of a company by gauging value of its equity in relation to debt. It is achieved by dividing the company’s total liabilities in relation to its shareholder’s equity.
This is an investment strategy where the investor only buy shares that have consistently paid out high dividends in the past or others with the fastest dividend rates. Dividend investing strategy advocates are more interested in how much a shares pays in dividends than its price fluctuations.
Growth stocks refers to the stocks of companies that are expected to grow at a faster rate than the industry average and report consistent and sustainable cashflows. The company sales and revenues are also expected to increase at a faster than that of an average company in the same industry.
These are also referred to as micro-cap or nano-cap stocks and refers to the stocks of relatively small companies valued less than $5 and only trade via the Over-The-Counter markets.
A blue chip refers to a nationally recognized and financially sound company with a long and stable record of consistent growth. It is company whose financial might and nature of operation make it well suited to face turmoil and remain profitable in the uncertain economic conditions..
Short selling is a trade/investment strategy where the investor is banking on the decline of the shares of a particular company. They therefore borrows these shares, sells them at the current market price and buys them back after they lose value, effectively profiting from the price difference.
Yield refers to the profit/earnings generated from investing in a particular stock or market instrument over a given period of time and is expressed a percentage of the stock’s market value, face value or as percentage of invested amounts.
Capital stock, also referred to outstanding shares, refers to all the regular shares issued by a company and held by all its shareholders including the restricted/locked-in shares held by company insiders, executives, and institutional investors. The number of capital stock is used in calculating key metrics including cash-flow per-share and earnings per share.
EPS refers to the monetary value, the profit or earnings attributable to each outstanding shares held by a company. It is a financial ratio that is arrived at by dividing the company’s profit by its outstanding shares of the common stock.
Also referred to as Price-to-earnings ratio, PER is a financial metrics tools used to check if a company’s shares are over/undervalued by dividing the shares current market price with its earnings-per-share.
A company’s flat refers to the number of regular shares issued to investors that are available for trading. The float shares figure is arrived at by subtracting the locked-in shares held by company insiders and executives from its capital stock.
Gap up stocks refer to company stocks that open the day trading at relatively higher prices than their previous day’s closing price. This is often attributed to the after-market trading activity.
Gap down stocks refers to company stocks that open the day trading at relatively lower prices that the previous day’s closing price. For instance if a company stock closes the day trading at $50 but opens the following day trading at $45, it is said to have a 5-point gap down.
Stock buyback, also referred to as share repurchase, occurs when a publicly listed corporation uses a part of its revenues to buy back its shares from the marketplace. The move effectively reduces the number of company shares in circulation, which translates to an increased share price.
HOLD is a financial recommendation issued by a qualified financial institutions or financial analyst advising investors/traders not to buy or sell a particular stock. It is a no-action situation where long position traders are advised not to sell and others investors advised not to buy into the stock.
This refers to the upper-most price level that a particular stock or any other security reaches but doesn’t exceed due to dwindling number of buyers and an increasing number of sellers.
Is a branch of economics that’s concerned with the study of how the economy and different large-scale markets are structured, how they behave, and how they perform.
Relative Strength Index is a technical momentum indicator used in market analysis to determine if a stock is overbought or oversold by measuring the magnitude of a recent bullish or bearish price run. It has a scale of 0-100 where RSI readings of 70+ indicate a stock is overbought while an RSI reading below 30 is an indicator of an oversold security.
Moving Averages is a statistical calculation that is specially designed to identify the arithmetic mean of a given number of data sets or range of prices calculated over a given period of time. Each of these data set or price range is created by the average/mean price for that subset. For instance, a single data point on a moving averages scale may represent the average stock price for a day or trading session.
Bollinger Bands are a technical indicator tool characterized by two statistical carts that run alongside each other indicating the changes in prices and volatility of a financial instrument like stock or commodity over a given period of time.
Fibonacci retracements refer to two horizontal lines that use the Fibonacci numbers to measure the percentage of price retracement in a bid to indicate where the resistance and support are most likely to occur.
What are Pink Sheets?
They refer to a listing service for stocks that belong to companies not listed on major exchanges. They can be traded over the counter (OTC).
What are blue-chip companies?
These are well established, recognized and financially sound companies. They have a reputation for reliable performance and stable growth even under adverse conditions.
Are penny stocks legal?
Yes, they are. However, there are plenty of shady dealings revolving around them due to the fact that they trade mostly on OTCs. Since regulations are not as strict as on larger exchanges, the possibility of fraudulent activity here is higher.
Can blue chip shares change into penny stocks?
Yes, some blue=chip companies consistently fail to maintain a per share price of at least $5. When this happens over a period of 6 months, they get delisted from main exchanges. They thus have to trade on OTC markets as penny stocks.
What are fallen angels in penny stock trading?
At the end of a bearish market trend, some shares may drop so low in value that they momentarily qualify as penny stocks. These are known as fallen angels.