Are Penny Stocks Worth It? 5 Lessons For New Traders

The Hottest Penny Stock Trends And How to Use Them to Your Advantage

Penny stocks are the talk of the town and for good reason. Throughout 2020 and 2021, investors have been searching high and low to find the best penny stocks to watch. And while some traders are more experienced than others, anyone with $5 can buy a share of a penny stock.

Now, there are several things to keep in mind before pulling the trigger on an order. This includes how to buy penny stocks, what's affecting the market right now, how to profit, and more. While this is not an extensive list by any means, it should help to give you a solid footing on how to start. It's worth considering that penny stocks have a lot in common with blue chips. And this can be a benefit for investors to consider.

But, several factors are also quite different when it comes to cheaper stocks. This includes knowing your volatility threshold, and how to find the most popular penny stocks right now.

Investing in any company comes with a lot of subtleties. But, the best way to avoid losses is with proper education. This means knowing the different nuances that can increase or decrease your portfolio value. Keeping this in mind, let's take a look at five lessons for new traders.

5 Penny Stock Lessons For New Traders

How to Buy Penny Stocks
Penny Stocks: Factors Affecting the Market Right Now
How to Profit With Cheap Stocks
Know your Volatility Threshold
Popular Penny Stocks Right Now

1. How to Buy Penny Stocks

Buying penny stocks can be easy. But, there are some key aspects that all new traders should know. The first and most straightforward is, what exchanges you can use. In April 2021, many traders buy penny stocks on Robinhood. But, this can be a disservice to some as it does not allow investors to access stocks listed on the OTC or over-the-counter exchange.

It's worth noting that there are plenty of penny stocks under $5 that are not on the OTC exchange. However, the OTC exchange is where the majority of penny stocks reside. This is due to the stringent and cost-prohibitive nature of listing on exchanges like the NYSE or NASDAQ.

Because of this, traders often turn to other brokerages like Fidelity, TD Ameritrade, Charles Schwab, Interactive Brokers, and a few others. While Fidelity and Charles Schwab offer $0 trades, TD Ameritrade and Interactive Brokers charge between $0.0035 and $6.95 per trade respectively. These fees can add up quickly when buying or selling several times per day.

Another aspect to consider is that investors often swing trade penny stocks. This means buying or selling shares of a company in a short time frame (1 day to 1 week). To day-trade or be what is known as a Pattern Day Trader (more than four day-trades in five business days), you have to have at least $25,000 in your account without margin. This is something that investors should consider.

2. Penny Stocks: Factors Affecting the Market Right Now

There are a few factors that are greatly affecting the market right now. Today on April 16th, we saw DOGE Coin reach above $0.49 for the first time in its history. This has significant implications for penny stocks due to the price correlation between the two. Additionally, other cryptocurrencies like Bitcoin, have also hit all-time highs over the past week.

Outside of cryptocurrency, we are seeing relatively low volume with penny stocks right now. There is no one distinct reason for this, but there are some reasons why this could be the case. This includes the impact of Covid, the time of year, and the higher-than-usual unemployment rates.

It's worth noting that unemployment rates are dropping, however, they remain quite high. As mentioned above, investors should also consider the effects of the pandemic on both the U.S. and the international economy.

While vaccine distribution is at an all-time high, we are still seeing countries with increasing case numbers. Hopefully, as we move into the summer, cases in the U.S. will continue to decline. But for now, this is a factor that should be kept in mind.

3. How to Profit With Cheap Stocks

There is no definitive answer to this question outside of educating yourself on how to trade. But, there are some ways to try and maximize profitability.

First, know when to pull out. The greatest traders will tell you to take incremental profits on the way to reaching your price target. This means, for example, selling 25% halfway to your target, 50% at three quarters, and the rest if it reaches your price goal. This is the best way to ensure that all trades can be winning trades.

Next, make sure you know the timeline of your investment. If you are betting on a company in the long run, it may be best to buy a penny stock and then forget about it. This can help to reduce the anxiety of seeing intraday price swings. If you are aiming for short-term gains, make sure you have goals for your price targets as mentioned above. Additionally, these goals should be realistic and achievable.

Lastly, make sure you know everything you can about the company you plan to invest in. This means knowing both the speculative factors impacting it and the fundamentals.

On one hand, speculation includes understanding news events that could impact prices. On the other hand, fundamentals include knowing what a company's revenue, profitability, cash balance, and outstanding debt amounts are. This is the best way to be confident in your position. While profiting with penny stocks can be challenging at first, proper research can help to avoid losses.

4. Know Your Volatility Threshold

Understanding your volatility threshold aligns wholly with your investing goals. If you are a long-term trader, it may be best to find a more stable company. If you are swing trading, it is more ideal to find a penny stock that is more volatile and thus makes larger intraday moves.

It's worth considering that the majority of penny stocks are quite volatile. This is due to both their prices and the high degree of speculation. While there are less-volatile penny stocks, it may take some extra research to find the best ones to watch.

Ultimately, knowing your volatility threshold and what your investing goals are, can help to ensure the best chance of seeing what you define as success, in your portfolio.

5. Popular Penny Stocks to Watch Right Now

InspireMD Inc. NSPR
Hudson Capital Inc. HUSN
Anpac Bio-Medical Science Co Ltd. ANPC
Seelos Therapeutics Inc. SEEL
Ballantyne Strong Inc. BTN

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