Beginner's Guide to Trading Penny Stocks

You Can Be Successful With Trading Penny Stocks

Woman Walking Up Penny Steps
Step by Step Up Penny Stacks. Sorbetto

Let's get you up and running with trading penny stocks quickly. To do that, we will eliminate any content which is not absolutely necessary, and leave you only with the action steps.

1. Begin By Deciding If Penny Stocks Are Right for You:

Penny stocks and low-priced shares are not right for everyone, despite the fact that they do have a lot of great attributes. They truly can turn a small investment into a large sum of money pretty quickly (but can just as quickly wipe those dollars out).

For many people, the potential for big rewards does not outweigh the risks. Be honest with yourself, and do not feel bad about walking away from the entire concept. In general, this is often the best choice, because MOST situations involving penny stocks result in many investors taking losses.

The good news: the reason most are wasting their investment dollars is they are buying the wrong stocks, at the wrong prices, and usually for the wrong reasons. These investment risks can be easily avoided, mainly by learning a little bit about the reality of trading penny stocks, which this article will show you.

For example, the vast majority of investors buy penny stocks that trade on the Dark Markets, and almost all of them will lose money. On the other hand, by getting involved with high-quality companies on the more serious and regulated exchanges, you pick investment choices from among legitimate and up-and-coming businesses.

These are mainly serious companies, with proven business models. The penny stocks listed on the best markets just so happen to be very new, or still small, and so are trading for pennies... until they eventually trade for dollars!

2. Risk Money and Honest Guides:

You should only invest in penny stocks with risk money, or those funds that you can afford to lose.

You also should only dip your feet into the waters of low-priced shares once you have gained significant knowledge, and have a strong stomach for the potential volatility, which can sometimes be found in the investments trading at the lowest prices.

Follow someone who knows the industry very well. An expert can help you avoid mistakes, and you can learn from his or her experiences. These are true words, whether talking about penny stocks, home renovation, cooking, yoga, or otherwise. The caliber of your results will be directly proportionate to the caliber of your guide.

There are a few potential mentors for you when you enter the world of low-priced penny stock trading. Some are (much) better than others.

Most (and this should be a major warning sign) will try to tell you about private jets and expensive cars, whether or not they have private jets and expensive cars! The promise is just like a lottery ticket — do this, buy that, trust this guy (or system or gimmick), and you can have a Yacht just like everyone who does this, and buys that!

3. Heavy Metal Lottery Tickets:

People want to turn a few hundred dollars into total financial happiness and freedom, so they let their guard down, and believe the promises.

This is what explains the success of the "robot that picks stocks" scam, the popularity of the Iraqi Dinar, binary options, marijuana penny stocks, and every other "close your eyes and hope" stampede, from the Dutch Tulip Bulb mania to the California Gold Rush...

If you want more recent and relevant examples, just think back to $1,300 Bitcoin, or the Dot Com Bubble. What ever happened to Darkcoin, Peercoin, Gridcoin (which was founded by Rob Halford, heavy metal singer of Judas Priest), Namecoin, Primecoin, and so on... and on... and on...

Don't fall through the lottery ticket promises. Investing well in penny stocks involves some work, some knowledge, and some guts.

4. Start By Paper Trading

You can avoid big mistakes by learning how to trade with the risk-free, no-money-required method of buying and selling low-priced shares, known as "Paper Trading." All you need is a pen and a piece of paper to keep track of imaginary trades in real stocks, using a portfolio of imaginary money.

 

This will probably be the best thing you will ever do in terms of penny stocks. By tracking imaginary profits on your imaginary Paper Trading, you can make a more knowledgeable jump into real money. This will also help you learn all the relevant penny stock lingo, learn from your mistakes, and appreciate all the things to look for when you try to find the next penny stock winners.

After you have Paper Traded for a couple of months, you will be much better in every respect when it comes to buying and selling speculative shares. This is not unlike taking a practice lap or two, before the start of the Daytona 500.

5. Decide Which Types of Companies You Will Focus On:

Most investors make the mistake of investing their money in whatever is the latest "hot industry." You know the one — it is talked about in the news, your cab driver mentions it, your grandma calls you up to suggest you buy some... 

The problem is that by the time you hear about which industry is hot, it typically means that it is on everyone else's radar by that point. The trade is already crowded, matured, and heavily overpriced.

In other words, the next move for the latest hot industry is almost always down. When it comes to penny stocks, the change from current fad to former fad usually results in the shares of all the penny stocks in that hot industry collapsing significantly.

The old expression goes, "buy what you know." If you are a medical scientist, you will have an advantage when trading biotech stocks. If you are an Internet programmer, your advantage will come when you're looking at various technology companies. 

Your Passion:

Not sure which types of businesses allow you the greatest advantage? Just take a look at what industry publications you have a subscription to, or what your passion involves. Mountain biking? Deep sea diving? Gold mining? Fashion?

Typically people overlook their own industry, and instead focus on what they think will make the largest difference for them. In so doing, they give up a major pre-established advantage that they didn't even know they have already. 

Our Human Nature:

This is just human nature, especially since the last thing you want to do when you're done work for the day, is to focus on other things related to that exact same work. Not always, but often, chefs don't cook their dinner, painters don't paint their den, internet entrepreneurs don't surf the web (too much, anyway).

You may be rewarded by reversing this psychology. Focus on those industries and corporations which you understand the best. When it comes to trading penny stocks, you want to bring every advantage to bear.

6. How Will You Generate Prospective Investments?

You need to find a source which is reliable and that you trust, and use that as a jumping off point to finding potential penny stock investments. In fact, you should probably have many sources.

NEVER trust any source 100 percent. Instead, use them simply to provide suggestions of prospective companies to watch. Then conduct your own analysis, make your own trades, and take full responsibility for the results.

You can find many stocks yourself, by using a stock screener such as FinViz.com (Financial Visibility). This is an example of a great online tool for uncovering potential investments, which you will better understand how to use the more you try it out, the more you Paper Trade, and the more you learn about investing.

There are also great stock screeners online for free through sites such as Google, and most major financial portals. If you want stocks trading at $3 or less, in the precious metals industry, you can set the screener to return only those results — this can then act as a great shortlist, through which you can find the penny stocks you want to trade.