In this guide, you'll learn how to invest in penny stocks and make 50 to 1,000% gains on your investment within a short to medium time frame.
We'll cover everything you need to know even if you're a complete beginner.
It's important to keep things simple when it comes to penny stocks. Learn the basics first then add more advanced strategies as you gain knowledge and experience.
What are Penny Stocks?
Penny stocks are generally known as cheap stocks under $5 or less. You can find penny stocks trading on major exchanges like the NASDAQ or NYSE but also the OTC exchanges (much more risky).
If you're a complete beginner then focus on the penny stocks trading on the NASDQ and NYSE. OTC stocks are a different ball game plus popular stock trading apps like Robinhood (read the Robinhood review) and Webull don't support OTC shares.
Why Invest in Penny Stocks?
It's simply a matter of ROI. For example, let's say you want to invest $1,000 in the stock market for the biggest returns.
You could buy stock in a large company like Nike or Starbucks and make decent gains. The problem is it takes a lot of money and time to make money with larger blue chip stocks.
Investing $1,000 in Starbucks only gets you around 12 to 15 shares plus you will get at best 20% returns annually. While I recommend blue chip stocks for your retirement, you want to target faster moving stocks if you want bigger gains.
Penny stocks give you the opportunity to turn $1,000 into $5,000 or even $10,000 in a short period of time. When penny stocks move, they often soar quickly and can grow your account in a hurry.
How Much Do You Need to Invest in Penny Stocks?
I recommend trading with a smaller amount if you're a beginner. Most newbies lose money at first because investing in penny stocks takes time, patience, and experience to understand the stock patterns and rules of the game. These penny stocks don't trade like Apple or Amazon. Penny stocks are extremely volatile and you can lose a lot in a hurry if you aren't careful.
$500 to $2,000 is enough to get started. The best amount is $1,000 because it gives you enough money to learn along the way while making some gains.
Open a Brokerage Account
You need a stock trading app with a good interface and fill rate to trade penny stocks. Here's a list of recommended penny stock trading apps:
All of these apps offer zero commission penny stock trades. Robinhood is the best choice for beginners while Webull and Fidelity are good secondary options.
Create a Penny Stock Watchlist
Once you're trading account is live, you need to follow some potential penny stocks to trade. Create a watchlist in your stock trading app and look for predictable trading patterns.
You can find stocks to add to your watchlist by going through different stock screeners, chatrooms, sub-reddits and social media accounts.
Here's a few places I like to check for penny stocks to watch
How to Find the Best Penny Stocks
The first place to look is at the daily volume leaders. Penny stocks move higher or lower due to volume. You want to target stocks with at least 1,000,000 volume on an given day.
I don't recommend buying low volume stocks because these stocks often trade at low prices for months or years. You need to do some research and figure out which companies are actively traded.
Why focus on volume?
Because penny stocks tend to go lower over time if nobody is buying the stock. You could buy at a high price and continue to lose on your investment over time. Identify a good company but wait for the right time to buy. Volume is how you know when to buy.
When to Invest in Penny Stocks
If a penny stock starts moving quickly during 1 trading session, it can move higher for a few more days, weeks or even months. Determine your strategy upfront so you know the best times to buy and sell.
The Long Term Gainer
Sometimes a penny stock can turn into a good long term hold if the company begins earning profits and shows off a glorious turnaround. A recent example of this is Overstock (OSTK).
Overstock traded at $3 during the COVID-19 stock market crash and many people thought they would go bankrupt. The global lockdown forced people to shop online and Overstock saw a massive increase in revenue and EPS. A blowout Q2 2020 earnings quarter skyrocketed their stock to over $100 a share. This is a best case scenario but also shows the power of buying low and not selling too soon for a quick profit.
The Classic SuperNova
Millionaire penny stock trader Timothy Sykes coined this pattern and most penny stocks nowadays trade like this. A supernova creates a massive surge in stock price followed by a slow but steady selloff as the early buyers sell off shares to investors who were late to the party. A recent excample of this pattern is Urban One (UONE).
Black owned businesses on the stock market soared after the George Floyd protests and this caused UONE stock to soar to the moon. Once the Juneteenth holiday passed, investors began dumping the stock and it fell from $50 to around $10.
Unless the company announces a new product or service, it's best to not chase these stocks and avoid them if you missed the huge runup.
However, most penny stocks are pump and dumps so be sure to buy just above key support levels and sell below key resistance levels to maximize your profits.
Penny Stock Investing Tips & Best Practices
- Cut your losses early to avoid blowing up your trading account. If I'm down 10% then I'll look to exit a short term trade and move on to the next stock
- Create a penny stock trading plan and stick to it. Your plan explains your entry/exit strategy and what to do if the stock falls.
- Buy above support and sell below resistance. You don't have to buy at the very bottom or sell at the highest price. Take the meat of the trade and move on.
- Stick to penny stocks under $5 if you want to make the biggest gains.
- Track your trades to analyze your performance. I use Tipranks & Tradervue to track my performance. If you want to keep things simple then use Microsoft Excel or Google Sheets.
- Don't wait too long to sell if the stock starts dropping quickly. Penny stocks can crash as fast as they rise so be careful. A small profit is better than a massive loss.
- Don't follow the crowd all the time. Sometimes a penny stock is overbought on greed and a massive crash is imminentn.
- Buy penny stocks when they cross above the 20 day moving average. A moving average is a sum of all the stock prices dividend by the number of days. It's a simple indicator that tells us roughly how much a stock is trading for at any given time.
- Use Stop Losses to Protect Against Losses. Penny stocks are risky so use a stop loss (or trailing stop) order to minimize your losses.
- Hold pump and dumps for 2 to 5 days. After that, volume dries up as traders move to to the next stock. Don't hold too long and get caught chasing losses.
- Identify hot sectors before the stock moves higher. A good example is when I recommended Electrameccina (SOLO) because Tesla stock went up so much. Stocks in the same sector often trade closely together.
- Aim for a 70 to 80% win rate. It's impossible to make money on every trade. You will have winners and losers.
- Don't try to guess where the stock is heading. Create an exit plan and leave the trade once things go wrong.
When to Sell Penny Stocks
Penny stocks often run up quickly but can go down just as fast. A key indicator is when the stock crosses below the 20 dma or when the stock posts multiple red days in a row. This is a bearish signal and you can exit the trend if this continues.