The stock market is an interesting place. It can help you make a lot of money; however, there appear to be a lot of myths about the market. Some people believe that you need millions in order to profit from the stock market but this is nothing more than a myth.
Thanks to the availability of penny stocks, it is possible to start very low and make decent gains. Those who have seen the hit movie The Wolf of Wall Street would know that real gains lie in penny stocks. Hence, it is important to know how to invest in penny stocks.
In this article, we’ll tell you all there is to know about penny stocks and the benefits of investing in penny stocks.
Penny stocks are defined as high-risk securities that are cheap with a small market cap. They’re usually traded outside of major exchanges and are very affordable to invest in with often little history.
While there is no specific value, most experts agree that the value of a penny stock needs to be below $5 per share. However, the share price doesn’t alone decide if a stock is a penny stock. The overall market capitalization also matters. Their market capitalization stands between $50 and $300 million.
The SEC defines penny stocks as stocks that are “not listed on a national stock exchange and that trade under $5 each share.”
Most penny stocks are traded via discount brokers; however, you may also find some on stock exchanges like the New York Stock Exchange. Quotations for penny stocks are done electronically with no OTC trading floor.
Penny stocks are quite lucrative and attract a large number of investors. Here are some reasons to invest in penny stocks:
The main benefit of penny stocks is the low price. It makes them a great pick for beginners or people who do not have a lot of money to invest in stocks. If you search the market, you may find some great penny stocks for under $1 per share.
We know that diversification is important. It reduces exposure and minimizes the risk factor while generating higher returns. Investing in penny stocks can be a great way to learn more about different investment options. Plus, since they’re cheap to buy, you’ll be able to buy different stocks without spending a lot of money.
Larger investments may offer good returns but they don’t teach shareholders much as they’re not very volatile and can even be boring to trade. On the other hand, penny stocks display greater volatility and give investors a chance to learn more.
Penny stocks are said to be a great pick for beginners since they offer great learning opportunities due to a steep learning curve. The combination of low prices with high volatility gives investors a great opportunity to learn the ins and outs of trading, which can be helpful when moving to larger grounds.
Penny stocks are highly volatile and can go in either direction without a warning. While this holds true for all kinds of stocks, reports say that penny stocks offer greater volatility. This makes them a great pick for people who want to make good profits.
Now that you know the benefits of investing in penny stocks, it is time to have a look at this step-by-step guide on how to invest in penny stocks for beginners:
Investment requires money, hence the first thing before investing in penny stocks is to see how much money you can afford to invest.
Sit down and answer one question – how much funds can I afford to lose?
This might sound a little odd to some but it’s important because the money you invest in penny stocks might not come back. As an investor, however, you must stay positive yet realistic.
If you are a beginner penny investor then we suggest that you start small.
The biggest benefit of penny stocks is that you can start very small – as small as $1 in some cases.
Let’s say someone has $100 to invest. For this amount of money, you will not be able to buy a single share of top stocks like Facebook and Tesla but you might be able to buy over a hundred penny stocks.
So, sit wisely and decide how much to start with so that if your decision backfires, you don’t end up in real trouble.
Now that you know how much amount you can afford to invest in penny stocks, it is time to look for a platform or broker.
A simple Google search will give you a list of top penny stock brokers for beginners; however, don’t just choose one blindly as there are several factors to consider when investing in penny stocks.
The two most important factors to consider are:
It costs money to trade penny stocks. You will have to pay a variety of charges such as deposit fees, transaction fees, etc.
Be very careful when picking a platform to invest in penny stocks for beginners since different brokers charge different commissions. In fact, you might even be able to find some penny stock brokers who offer $0 fees but there might be some additional surcharges, so make sure to go through the blueprint so that there are no surprises in store.
There are thousands of penny stocks out there and not all might be available on a single platform. Ideally, you should pick a broker who gives you access to a large number of penny stocks to invest in so that you have a nice variety to choose from.
Also, it might be a good idea to choose a broker for penny stocks who offers more than just penny stocks as you might want to diversify in the future and choose larger companies.
A large number of people choose to invest in penny stocks due to the low price, however, it will all go to waste if the broker you choose has tough minimum deposit requirements.
It is quite understandable why a broker may prevent you from buying a single share costing under $1. You will have to buy lots that may consist of 10, 100, 1000, or more shares.
Go through the details and ensure you know how much money you will need to get started in investing in penny stocks.
Whether it’s online or offline, you must choose a penny stockbroker who offers great security so that your money, private information, and stocks remain safe and secure.
Hacks are pretty common and a single breach can end up costing you a lot. Choose a broker that offers good encryption and security.
Keep these things in mind when choosing a penny stockbroker. Some of the best picks include Fidelity, TD Ameritrade, Charles Schwab, TradeStation, and Interactive Brokers. Some of these platforms come with $0 per trade.
Step #3: Sign Up for an Account and Get Verified
Once you have selected a platform, it is time to sign up for an account. Some platforms may have certain limitations or conditions, i.e.: they might not be available in some states or they might require you to submit certain documents to confirm your identity.
The entire process can take a few days. Plus, you may have to look at payment methods since one platform may not support all methods and some might be slow. Checks, for example, can take up to a week to get credited to your account.
Make sure to use your real name and correct information when signing up, otherwise your profile may not get approved. You may also have to provide tax information, however, filing has to be done manually in most cases.
Step #4: Do a Bit of Research Before Investing in Penny Stocks
While you wait on your profile to get approved, look online and search for reliable penny stocks to invest in. It is your duty to perform due diligence, whether you’re investing $100 or $1000.
Don’t just trust random best penny stocks lists on the internet. You must do a bit of research and verify every name. A safe way to check the reliability of a company is to go to the SEC website and see its history.
Try to avoid stocks that do not appear on the website. Similarly, it might be a good idea to avoid stocks that have been delisted from an exchange. If you understand finance then consider getting copies of the company’s recent SEC filing so you can have a full understanding of its financial health.
It is your duty to understand how a company is doing and what kind of potential it offers. Turning to a stock screener might be a good idea as it can help you choose stocks based on criteria such as price.
While it takes time to research, it’s often worth the time and effort. However, do this only if you understand how stocks work. Consider seeking professional help if you are a beginner. This Investment Advice from Warren Buffett 2021 article might help you make the right call.
Note: We must mention in this How to Invest in Penny Stocks for Beginners guide that the OTC markets organize penny stocks into multiple tiered marketplaces. Understand this system so you can pick the right penny stock.
Once you have decided where and what to invest, it is time to start trading penny stocks. You might lose some money in the beginning, don’t lose hope and take calculated risks.
If you are new to the world of trading then consider studying a little more about how it works.
Penny stocks offer great returns but they don’t come without risks. Anyone interested in knowing how to invest in penny stocks should be fully aware of penny stock risks discussed below:
While some people argue that high volatility is a plus point, it can end up being a disadvantage in no time.
It’s quite understandable why penny stocks are so volatile. Since they’re cheap, even a little movement in the price can be huge in terms of percentage.
Think about this, a gain of $0.50 might not sound much when you think about it, however, it may be a gain of 100 percent if a stock is priced $1 each. It is very rare that traditional stocks gain or lose this much in a day, but it is quite common when it comes to penny stocks. However, the bad thing is that the price may move in either direction.
You might double your money in a day or lose all that you had. The risk factor is very high, which makes it a bad choice for some investors.
Millions of stocks are traded every day. Big names found on major exchanges like the NYSE or the Nasdaq are very liquid and hence easy to buy and sell since there are a huge number of shares and a growing number of buyers/sellers.
Brokers are willing to buy shares because they know they’ll have no difficulty finding buyers. However, the same cannot be said for penny stocks since the market for such stocks is very small. This holds true even for stocks that are found on big exchanges since trading volumes in such stocks isn’t high, which can make it difficult to find buyers.
It can often be a little difficult to find a buyer even if the stock has increased in value since you bought it. This makes it hard to realize the profits you have made on paper.
While some small companies have gone on to make millions, the fact remains that penny stocks belong to new or unproven companies that have no proven records.
Some of these companies do not have a history that makes it hard to research before making investment decisions. At times, you will have to base your decision based on what others are saying with little personal research.
On the other hand, with mainstream stocks, you will be able to find data including past numbers, guidance, and even target price.
As odd as it may sound, penny stock scams are quite common. Scammers use a variety of tricks to lure investors into investing in unknown and worthless companies with the aim to take their money.
Some of these companies only exist on paper with no office. Since penny stocks aren’t well known, new investors often have no idea about where to look and they end up falling for penny stock scams.
You must take due diligence to avoid such risks. The key lies in working with known brokers and avoiding new names so that your money remains safe.
Penny stocks can help you make money if you play smart and invest in the best penny stock 2021. While there are some penny stock investment risks, being careful and doing a good amount of research can keep your money safe and ensure you get good returns.
So look around and choose a top penny stockbroker and start investing in penny stocks.
CFO & former Wall Street analyst helping your reach financial independence.
Download my eBook “20 Ideas to Earn Extra Money from Home.”
Take my financial planner course to learn the secret to building wealth that they never taught you in school