No one is born with an innate understanding of trading penny stocks. All successful penny stock traders have to start somewhere, and most experience plenty of bumps in the road on their way to earning regular profits. The main thing that they have in common is persistence. So we created the Penny Stocks for Dummies guide to provide a basic outline of what penny stocks are and how to trade them.
This guide doesn’t contain elaborate strategies. It simply outlines the basic things that you need to know before you get started. This guide is intended for people who are curious about penny stocks. If you fall into that category, it’s in your best interest to read this guide from start to finish. When you are done, you will have a basic understanding of how penny stocks work. You will also know the basic terms that are involved in trading them.
Penny Stocks Defined
No one seems to agree on what constitutes a penny stock. Some folks define them as stocks that cost $5 or less per share. Others put the limit at just $1. For the purposes of this guide, we will define penny stocks as stocks that cost $3 or less per share.
Penny stocks are typically attached to new companies. It’s not unusual to find penny stocks for tech start-ups, for example. Getting in on the ground floor of the next Google would be a major coup, and it’s possible with penny stocks.
Unfortunately, there are scams out there. Some companies are strictly set up to quickly round up money from unwitting investors. That’s why it’s important to be as informed as possible before making a trade. So always do your research!
A Quick Note About Risk
Any ” Penny Stocks for Dummies ” guide worth its salt should tell you that Penny stock trading can be risky. However, the biggest risk associated with any stock trading is not conducting thorough research. Trading penny stocks is even riskier than trading more traditional stocks because you’re dealing with companies that aren’t financially stable. This means that you must learn as much as you can about their finances and their system of management.
Basic Terms Defined
Without knowing the basic terms that are used with penny stock trading, you’re going to be totally lost. The most common penny stock trading terms and definitions are outlined below.
- Block Trade – Trading 10,000 shares or more of a stock at one time.
- Day Order – A sell or buy order that only remains valid for one day.
- Dollar-Cost Averaging – Buying securities at fixed amounts and at regular intervals.
- Earnings Per Share – Total net income that’s earned per share of common stock after dividends have been paid to stockholders.
- Float – The total number of shares that are typically available for selling and buying.
- Hot Issue – A new issue that is generating buzz and is in high demand.
- In-and-Out – Buying and then quickly selling a stock in order to earn a profit quickly.
- Inactive Stock – A stock that trades at such a low volume that it’s essentially inactive.
- Listed Stock – A stock that is listed on one of the prominent exchanges.
- Market Price – The last reported price, or current price, of a stock.
- Nominal Quotes – Quotes that aren’t necessarily accurate. They may be drawn from out-of-date information.
- Odd Lot – A stock trade of 100 shares or less, a Penny Stocks for Dummies favorite.
- Pink Sheet – A list of bid and ask prices of over-the-counter stocks that don’t have stock symbols.
- Quote – The bid/ask price that’s provided by a broker or online service. Outlines the lowest offer to sell and the highest bid to buy a stock at a specific time.
- Rally – A rapid increase in market activity and value.
- Round Lot – Typically a 100-share unit of stock.
- Shares Outstanding – The total number of company shares that are owned by the public and not the company.
- Stock Limit Order – An order to sell or purchase a stock when the price hits a certain level.
- Shot from the Sky – A sudden downturn in the market.
- Stop-Loss Order – An order to sell a stock when a specific price is reached.
- Tick – A fractional change in the price of s stock.
- Volatility – The price movement of a stock.
- Volume – The total number of shares that are traded for a stock or market.
Fundamental Analysis and Technical Analysis
To trade penny stocks effectively, you have to know how to choose the right ones. It’s easier to do that when you engage in fundamental analysis and technical analysis.
Fundamental analysis refers to the process of investigating a stock and the company that’s behind it. The goal is to look for signs of financial stability. You should also look for signs of potential growth.
A huge part of engaging in fundamental analysis is poring over companies’ financial statements. 10-K statements, or yearly statements, are essential in this regard. 10-Q statements, or quarterly statements, are very useful, too. Companies must make these statements public, so you should be able to find them when you need them.
Technical analysis is the process of looking for trends or patterns in the market. The easiest way to do that is by using first-rate software. Charts and graphs are the bread and butter of technical analysis. When paired with fundamental analysis, this strategy will make it easier to find the right penny stocks to trade.
The Top Benefits of Trading Penny Stocks
No “Penny Stocks for Dummies” guide would be complete without highlighting the top benefits of trading penny stocks. The most obvious one is that the potential for considerable profits is quite high. If you buy 2,500 shares of a $1 stock, for instance, and the price moves in your favor by just 50 cents, you will earn a profit of $1,250. With a regular stock that costs $50 per share, on the other hand, a 50-cent movement on 50 shares would only earn you a $25 profit.