Picking the Right Stock: My 3 Tips
These tips that I’ve been covering with you for the past few issues don’t amount to a simple to-do list that you can follow and then consider yourself a great trader.
For the best results, you’ll have to revisit several of the steps over and over at various points in your trading career.
For instance, while you may master the basics of penny stocks pretty quickly, it’s important to go back and revisit your studies every now and again to brush back up on the basics.
And continued studying of patterns and research are habits that you should adopt early on and maintain throughout your career as a trader.
Routine and trading go hand in hand, so be sure to dedicate yourself to the process wholeheartedly!
Where Can You Buy Penny Stocks?
Let’s get familiar with some of the other exchanges where you can pick up penny stocks:
Pink/Grey Sheets: The pink or grey sheet exchanges are where you’ll find the smallest publicly traded companies out there.
These stocks are very volatile. They’re rarely liquid enough for penny stock trading. Most of the companies on these exchanges will trade for $5 per share or less, but the lack of liquidity makes them less than ideal.
The OTC Bulletin Boards: Also referred to as the OTCBB, this is an electronic exchange that features companies that aren’t listed on the NASDAQ. The stocks here also typically trade for $5 or less per share, but tend to have better liquidity and volatility. This makes them better contenders for penny stock trades.
The NASDAQ Smallcap Market: This is my all-time favorite market. It’s the NASDAQ of penny stocks–literally. The stocks here typically trade between $1 and $10 per share.
The market is extremely liquid and the stocks trade millions of shares — sometimes 10 to 20 million shares traded per day. They’re also volatile, which is a winning combo for pennystocking. In my opinion, this exchange must be on your radar.
Best Online Broker for Penny Stocks
No, you’re not just going to call up a small company and ask to buy penny stocks. To buy and sell penny stocks, you need to make the transaction through a broker. Most traders these days opt to use online brokers, and here are some of my thoughts:
E-Trade is a big and popular online broker. They have a great, user-friendly interface and plenty of features.
They charge commission fees of $6.95 per trade (at the time of this writing), which isn’t insignificant, but in general you get a lot of benefits for what you pay for in terms of quick service and reliability.
Also, you don’t need a minimum amount to set up an account, so it’s ideal if you’re trading with a small account. I almost always have an E-Trade account open for trading smaller amounts of money.
Penny Stock Trading Software
In addition to a broker, you’ll want to have access to penny stock trading software that will help you perform analysis on the stocks you’re considering.
StocksToTrade is an incredible platform for penny stock traders that includes a variety of features including scanners, charts, watchlists, level 2, and more. The filters are adaptable, so you can adjust your searches to suit your particular trading strategy.
The platform also features a paper trading module, so that you can test out methods and trading techniques before you risk actual money. This can be a great way to put your research to work and test it out.
Key Tips on How to Buy Penny Stocks
Looking for some more insight for choosing penny stocks?
Chew on these great tips…
1. Look for Volatile and Low Priced Stocks
Volatility is a misunderstood quality about stocks. It simply refers to how quickly and sharply stock prices are moving. It can be scary, but it’s a good thing when it comes to penny stocks.
It’s these price swings that can help penny stock traders make money. The thing is, when a stock has a swing in one direction, it will eventually reverse, like a pendulum. The key is not getting caught on the wrong side of the momentum. That can get very scary very fast.
Volatility makes stock prices move, so that you can potentially earn profits. This is a phenomenon that is more appropriate for low-priced stocks than higher-priced ones.
The thing is, higher-priced stocks simply aren’t as volatile as a general rule. The companies tend to be more stable given their size.
Because of the smaller size of companies trading penny stocks, there’s a lot more built in volatility which can potentially allow you to grow your account quicker.
2. Don’t Use Leverage and Never Trade Too Big
Leverage refers to taking a large trading position with only a small amount of capital. I don’t like leverage, and don’t suggest it for penny stock trading.
Penny stocks are one of the least complex types of plays, so just about anyone can trade in this way. It’s an ideal starting place for traders, and leverage just really isn’t necessary.
3. Don’t Skimp on Your Trading Education
In the scheme of things, very few traders will make it big. Pursuing a day trading education can help stack the odds in your favor.
The Bottom Line
The entry into penny stock trading is easy, but learning how to buy penny stocks and trade effectively is a bit more complicated. There are many things to take into account before you get trading.
However, by taking the time to educate yourself, create a support network, and establish good habits, you’re setting a strong foundation for your future as a penny stock trader.
— Tim Sykes
Editor, Penny Stock Millionaires