Penny stocks are often touted as get rich quick schemes because of their less than stellar reputation, but there is money to be made with them. However, you should understand the risks associated with trading these stocks before you begin. Always speak with a financial advisor if you have any questions about the trades you're hoping to make.
Stick with NYSE and NASDAQ to Start
The majority of penny stock trading is done via the Bulletin Board or through pink sheets, but there are a few stocks listed on NYSE and NASDAQ that meet the penny stock definition. Any stock that's trading under $5 per share is considered a penny stock. Stick with trading these stocks while you learn the ins and outs of trading as you're less likely to encounter pump and dump schemes that can play out on smaller penny stock markets.
Free Stock Picks are Worthless
Most people who are sharing penny stock newsletters and free stock picks are paid to do so, or they're promoting their own position. You should avoid investing in free stock picks from any of these sources, as they are likely very thinly veiled pump and dump schemes. For example, someone might buy up thousands of shares of a stock trading for $0.27 or so. Then they pay promoters and penny stock bloggers to share their asset as the next big break-out in penny stocks. Newbie investors start buying the stock and driving the price up. When the scam artist reaches his target price, his massive sell-off causes the price to tank, and now people are left holding a ticket for something less valuable than when they bought it. Avoid these situations by not relying on free advice on the internet that you haven't backed up with your own research.
If You're New to Trading, Start with Paper Money
Paper trades are theoretical trades you make with real market data to determine how your trading strategy works. Making imaginary trades with paper money will help you understand the flow of the market and where to look for patterns that you can exploit to make money. TD Ameritrade has a platform exclusively for trading paper money with real market data called Think or Swim. You can sign up for free and use the service for 60 days to help you understand how penny stocks perform on the market.
Understand the Tools of the Trade
Most newbie traders go into trading with the mentality of making money on their hunches, but that's a quick way to lose everything you plan on investing. Seasoned traders use technical analysis, stop loss orders, and limit orders to protect themselves as much as possible on their calls. If you're not doing the same, you're guaranteed to lose money; it's just a matter of when it will happen. Understand how to use technical analysis to get the ins and outs of a candlestick chart, and you'll be miles above most newbie traders.
Be Wary of Confirmation Bias
This tip applies to all types of trading, but it's most prevalent with penny stocks where traders tell themselves they're making the right play to make gains. Be careful with your plays and set stop loss orders and use limits to fill at the price you want, rather than market price. These tools will help you out of a jam if you make an error in judgment, which is bound to happen in your trading career.
