There are many different ways one can invest in and trade with company equity. The most common method is to invest in high-performing stocks on the world’s leading exchanges. This is considered the traditional way of stock trading, and it is reasonably safe although all types of trading include some risk.
Another popular way of trading stocks is by using CFDs. CFDs allow you to invest in the market price movements instead of buying the actual share.
Then there is a third and very popular way of trading stocks. This type of stock trading is called penny stocks. On this page, we’ll explain everything related to trading penny stocks. We will start by outlining the definition of a penny stock and the benefits of trading this way, we will then dig deeper into investment strategies and offer some tips on how to trade penny stocks. After that, we’ll talk about the best penny stocks to buy and provide some insight on where to find them. To finish this penny stock trading guide, we’ll mention a few of the risks involved in this type of stock trading and offer a quick summary of involved regulation.
If you’re looking to learn more about penny stock trading this page is for you.
What Are Penny Stocks?
What defines a penny stock depends on who you ask and in what market you are looking. A penny is the smallest amount of the British pound (GBP) and one British pound is one hundred pennies. Today, the same system is used for the dollar, for example, one penny is a hundredth of a dollar although a penny is officially called a cent in the United States.
As you might have guessed a penny stock is a stock that sells for pennies. However, the definition still varies quite a bit. In England, a penny stock is a stock in a publicly traded company that at any given time sells for less than one pound. In the United States, a penny stock is typically a stock that sells for less than a dollar. However, the U.S Securities and Exchange Commission (SEC) defines a penny stock as a security that trades below 5 dollars per share.
If you look at other markets, the definition of a penny stock differs. For example, in Sweden, a penny stock is defined as a stock that’s traded for between 5 to 10 SEK or 50 cents to $1.50. In India, on the other hand, a penny stock can be worth as little as a fraction of a cent.
In general, the best penny stocks are very cheap so that they can be traded in large amounts with smaller initial investments. The opposite of a penny stock is a blue-chip stock or a well-established stock such as Berkshire Hathaway or IBM.
What Makes Investing in Penny Stocks Unique?
Penny stocks are unique for a few different reasons. Firstly, due to their small price, they have minimal market caps which makes them highly volatile. Because of the fluctuating nature of penny stocks, some regulatory bodies refuse to acknowledge and regulate them. This has led to a lot of penny stocks being traded outside of the world’s national stock exchanges. But don’t worry there are still many penny stocks that can be traded on regulated exchanges and with licensed penny stock brokers.
According to both American and British securities agencies, a penny stock has to be traded off a major exchange, otherwise, it’s not considered a penny stock. Although, generally speaking, a penny stock is just a cheap stock which means they can be found on all major exchanges and be traded with most stock brokers.
How Do You Buy Penny Stocks?
So how do you buy penny stocks? Well, there are several designated penny stock brokers that you can choose from, but in some cases, the best penny stocks can be bought from the company itself. To learn more about how to buy stocks we suggest you take a look at our guide about buying stocks.
If you want to invest in penny stocks or buy cheap stocks from the leading exchanges using CFDs, we recommend that you use one of the brokers listed below. These are secure and licensed brokers and a safe way to invest in penny stocks.
The Benefits of Buying Penny Stocks
We hope you have a better understanding of what a penny stock is and what defines the term. Now we’ll move on to talking about why you should buy penny stocks and explain the benefits of trading hot penny stocks.
High Potential Profit – There are several benefits for traders that buy penny stocks. The most obvious is that you can buy many shares at once and make a quick profit. You can either buy penny stocks on your own or by using penny stock brokers.
Let’s say you find a penny stock that sells for $1 and you have $10,000 to invest, meaning you buy 10,000 shares in the said company. If the stock price then increases by just $1, you will have made $10,000 in an instant. A 100% gain on the regular stock market is rare and it typically takes months or even years, but due to penny stocks volatile nature, a 100% increase can happen over a day.
Penny Stocks are Beginner Friendly – Thanks to the low prices it’s easy for beginners to start buying penny stocks. Few stock traders start off with tens of thousands of dollars to trade with, and the smaller your available investment amount is, the more limited you are in a regular market. Instead of focusing on large and expensive stocks, you can focus on smaller ones and be able to invest in more stocks, thus increasing your potential payoff. Penny stock trading is more about quantity than quality.
Even the Best Penny Stocks Have Less Competition – Many “serious” traders are wary of penny stocks because of their increased risk, and for you, that can be a good thing. Since many traders avoid these kinds of shares, the competition is less and your chances of excelling are greater. In fact, by applying a few simple strategies and learning how to find patterns on the market, you can quickly become quite efficient as a penny stock trader.
Less Regulation – This aspect is controversial and what some would call reckless, but we feel like we need to mention it. We always recommend that you use a licensed and regulated broker because it gives you an extra layer of protection. All the stockbrokers we recommend on BullMarketz.com are 100% regulated and safe, and we would never recommend anything less.
The issue is that penny stocks create a natural contradiction. Since some of the best penny stocks aren’t traded on regulated exchanges, many of the services and brokers that offer
them are not as tightly regulated. Generally speaking, unregulated brokers are easier to sign up with, they won’t ask as many questions, and they provide some natural financial benefits.
That being said, we DO NOT recommend any of our readers to ever use an unregulated broker to trade any securities, whether it be stocks, cryptocurrencies, forex or anything else.
Are All Cheap Stocks Penny Stocks?
No, not all cheap stocks are penny stocks. At any given time there are cheap stocks listed on most major exchanges, and even though they are cheap they are not necessarily penny stocks. The reason for this is that penny stocks are defined by their high volatility and not all cheap stocks are volatile.
Let us use an example to explain why.
During the 2008 economic crisis, many of the stocks listed on the NYSE and Nasdaq in New York plummeted to record low numbers, and many highly sought after stocks reached levels that had never been seen before. For example, the AMD stock dropped to $2 a share and Citigroup’s stock plummeted to below $1. This didn’t automatically turn them into penny stocks since they were listed on major exchanges and because they are considered to be serious and reliable companies. In the end, it comes down to personal definition and some investors might argue and claim that cheap stocks are, in fact, penny stocks.
The Best Penny Stocks to Buy and Penny Stocks to Watch
What are the best penny stocks to buy? Well, that is the million dollar question that we’re all trying to figure out. The problem is that it constantly changes and the top penny stocks today might not be so hot tomorrow. The truth is that we can’t tell you what penny stocks to watch or where to invest, but we can advise you on how to find value on your own.
As with any investment, it is a good idea to focus on an industry or a market that you’re familiar with or possibly an industry that has a lot of potential. In today’s society, the tech industry is one of the most lucrative and where you can find a lot of top penny stocks. In fact, a majority of people that buy penny stocks today do so in the tech industry.
There are several smaller tech companies that are developing products and services that have the potential to change the market one day. Your job is to find these companies and buy their penny stocks. As always, there is no way to guarantee profits and most of these companies are fairly new without a track record to evaluate which makes strategies a bit more difficult at times.
The best advice we can give you is to search for penny stocks that are stable enough to not be overly risky yet volatile enough to offer possibilities to make a good profit. In the end, you have to follow your intuition.
Other useful advice we can offer you is to find the best penny stocks on smaller markets. Try and focus on a smaller country such as Norway, Greece, Malaysia, etc. and look for companies that have the potential to change the local economy. Generally speaking, those are good penny stocks to buy.
How to Buy Penny Stocks and Penny Stock Investment Strategies
After you’ve used the tips above to find some penny stocks to invest in and some penny stocks to watch, you need to decide on a strategy to use. Are you planning to day trade penny stocks or are you looking for long-term investments? Let us clarify how to trade penny stocks.
Day Trading Penny Stocks – Most traders that invest in penny stocks are day traders. Since penny stocks are known to fluctuate a lot they are best suited for day trading, meaning you invest today and sell later today or in a few days. In other words, the best penny stocks are designed for quick investments and you normally don’t buy them with long-term goals. One good way to day trade penny stocks is to use a CFD broker.
Long-term invest in Penny stocks – Even though top penny stocks are best for day trading, it doesn’t mean you can’t plan to invest in penny stocks long term. You might stumble across a hot penny stock for a company that is creating innovative products that will make the stock surge within time. That would be a great investment. Just imagine if you paid $1,000 for 1,000 shares in a company that was just about to launch a revolutionary product and before you know it, the stock is $20 per share or even $200.
Are There Penny Stocks with Dividends?
Yes, there are penny stocks that pay dividends but it is very rare. Normally, dividends are paid by companies that have good and stable profit, an expensive stock, and a large market cap. However, there are exceptions.
Some companies with penny stocks pay dividends which not only adds incredible value to you as an investor but also lowers the overall risk associated with your penny stock portfolio. Certain traders make it a priority to only buy penny stocks with dividends since it will give them a guaranteed payout four times a year. Just don’t expect penny stock dividends to be very high.
Risks with Penny Stocks and How To Best Avoid Them
All forms of trading come with a certain level risk, that’s a part of the thrill. That being said, some forms of trading are associated with higher levels of risk and penny stocks are one of them. By no means are we saying that you shouldn’t buy penny stocks, but by being aware of the risks, you can attempt to avoid them.
Market Manipulation and “Pump and Dumps” – Penny stock trading has had a reputation for being a playground for market manipulators. Since these shares are so cheap, a company or a private individual with enough cash flow can step in and buy large quantities of shares in order to manipulate the price. Many of the world’s regulatory agencies are concerned about penny stocks for this reason alone.
Market manipulation is often called Pump and Dump which refers to the notion of pumping prices by buying stocks, before dumping the price by selling in mass. This system has become widely popular in the cryptocurrency market and is something we see with many fresh-off-the-bat ICOs (Initial Coin Offerings).
Avoiding market manipulation can be tricky. We suggest you only buy penny stocks in serious businesses and that you sell your assets as soon as price developments start acting strange.
Lack of Regulation and Penny Stock Scams – We already mentioned how lack of regulation can be a good thing, especially when you trade penny stocks, although, we can’t forget the risks in an unregulated market. Lack of regulation always attracts scam artists and the penny stock market is riddled with them. Therefore you need to always be careful of who you trust with your money and the assets that you invest in. By sticking to our recommended brokers your safety is guaranteed.
These two golden rules can be very helpful:
- If it sounds too good to be true it probably is.
- There is no such thing as free money.
Sudden Delistings – This aspect is really connected to the lack of regulation and it is unique to the penny stock market today. When you invest in stocks on the regular stock market, you know that the companies have gone through a long process to even be considered for a listing. You also know that there is a safety net that ensures the company is honest
and that it won’t just disappear overnight.
Unfortunately, the same doesn’t apply to unregulated penny stocks. Many times penny stocks are associated with companies that have just started or that are struggling in one way or another. Naturally, this can lead to the business going bankrupt at any given time or even being delisted.
Who Regulates Penny Stock Trading?
It depends on where you buy your penny stocks. If you invest in penny stocks using regulated stock brokers, your investments are regulated and protected by world leading agencies. If you choose to buy penny stocks off the regulated exchanges, you are on your own. We don’t recommend that anyone do this – stick to regulated penny stock brokers.
The brokers we recommend are licensed, regulated, and safe to use. You can use them to trade stocks and other assets without a worry in the world. We also offer guides on different assets, similar to this one, about how to buy penny stocks. Additionally, we suggest you only invest in regulated markets no matter the securities.
A Quick Summary of Penny Stocks
Penny stocks are cheap and unregulated stocks that are being sold on small exchanges across the world. These type of stocks are characterized by their fluctuating nature and high profitability, which is why it is so popular to buy penny stocks today.
Most people day trade penny stocks and some use them to diversify their existing stock portfolios. They are fun, action-packed, and offer high payouts in exchange for inflated risks for anyone willing to give them a try. If you’re looking to invest in the best penny stocks, we suggest you start by reading this guide on how to trade penny stocks.