Do you appreciate a good bargain? Are you new to the Penny Stock Market world? Do you know what is Penny Stocks?
I was at one point too! But, I am already jumping into the Wolf of Wall Street. Want to join in?! Here is our detailed guide that will take you through the Penny Stock Market. Will the next hot penny stock make you rich? Could be if you follow through this guide, First, you will need to understand the fundamentals, risks and advantages, and valuable tips & tricks that play into the magical world of the Penny Stock Market.
What is a Penny Stock?
First thing’s first, what even is a Penny Stock? Penny Stock, also known as micro-cap stock, represents any company trades for less than $5 per share. These stocks are usually between $0.01 and $2. You can even trade at fractions of a penny. Companies that trade in Penny Stocks are found on the OTC market.
What is the OTC market?
Which brings us to our next question, What is the OTC market? OTC Market (Over-the-Counter Market) is a decentralized stock market that includes a network of companies that trade stocks, currencies, commodities, and more. Over-the-counter markets do not have physical locations; instead, trading is conducted electronically. Companies and traders trading on OTC markets could range from basic penny stocks or first-time traders to some of the world’s biggest conglomerates or veteran bankers.
OTC Market has three tiers for trading, which are operated by the OTC Market Group.
- OTC Pink: Also called Pink Sheets, It is the lowest tier of the three marketplaces and also the largest according to the number of companies and trade volume.
- OTCQB: It is the second tier of OTC markets and is known as “The Venture Market”. To be listed, unlike the Pink Sheets, all companies in the Venture Market must meet a minimum of a $0.01 bid price test and undergo a yearly verification to ensure legitimacy.
- OTCQX: Is the third and highest tier of all three OTC markets. Stocks traded on OTCQX are under higher levels of scrutiny than those in the first two tiers. Penny stocks, shells and companies in bankruptcy cannot trade in OTCQX.
For a company to jump or uplist from the lowest tier to the top one, it has to achieve certain requirements and reach high revenues with professional business activity.
Before jumping into the stock world and what is penny stocks you need to understand the language of stocks. Learn, understand, and memorize these terms, or bookmark this page as you will be coming back to these terms A LOT.
- Call: A call option gives you the option, but not the obligation, to purchase a stock at a certain price at a specific date.
- Premium: The amount a buyer pays to activate a call option.
- Strike Price: The price of a call option stock.
- Spread: the difference between the ask and the bid prices of a security, like a stock, bond or commodity. For example, if the ask of $SKDI is $0.6 and your bid is $0.4, the spread would be the $0.2 between them.
- Ask: the lowest price someone is ready to sell a share for.
- Bid: the highest price someone is prepared to pay for a share.
- Broker: Think Leonardo Dicaprio in The Wolf of Wall Street. A broker is a firm or an individual that acts as the middle-man between a buyer and a seller. He organizes the deal between the two and gets paid a certain commission for it.
- PPS: Price Per Share, is the current price of 1 share. For example, $SSET has a PPS of $0.17 means the price of 1 share of $SSET is currently valued at $0.17
- Options: Gives an investor the option, but not the obligation, to buy or sell a stock at a certain price on a specific date. There are two types of options: Calls & Puts.
- Calls: A bet that a stock will rise.
- Puts: A bet that a stock will fall.
- Slapping/Spanking the Ask: a stock market slang which refers to rallying buyers to buy at the price of the ask so that the stock price rises.
- Short Squeeze: occurs when the demand for a stock heavily outweighs the supply causing the stock price to skyrocket. The recent GME saga is a great example of a short squeeze.
- Dividends: the process of distributing a certain amount of the company’s earnings agreed upon by the board of directors to the shareholders as a token reward. Usually, it is a portion paid from the company’s net profits. This reward can be paid in the form of cash or additional stocks, also known as stock dividends .
- Growth Stock: A Growth Stock is a stock of a company that sees more increased revenues and faster earnings than the average company within the same industry. Growth Stocks pay small dividends or no dividends at all. That’s because growth companies are more willing to reinvest their earnings to expand their growth in the short term.
- Bear/Bearish: A bear is an investor who believes that a particular stock, or the broader market is headed downward and may attempt to profit from a decline in stock prices. A bearish investor may take short positions in the market to profit off of declining prices.
- Bull/Bullish: A bull or bullish investor believes that a stock or the market will increase in value over time.
- Blue Chip Stocks: Stocks that belong to well-established, reputable companies with high market capitalization and low records of risks. They are usually one of or the leaders in their industry. Examples include Apple or Tesla.
How To Start Trading Penny Stocks?
By now you might be thinking “Okay, I know what is penny stocks, now how do I start trading?” Well, for starters one would need a brokerage account and a broker. When trading, you will need a trusted broker with good customer service and a track record for meeting customers’ expectations. Based on multiple considerations, here are the best penny stock brokers for 2021:
- Interactive Brokers: is an institution that serves as active traders with the goal of making trading less complicated. This broker offers a professional gateway to the penny stock world through two main plans; IBKR Lite ($0 commission) and IBKR Pro (maximum 1% of trade value). One of the biggest, if not the biggest competitive advantage of Interactive Brokers is that it’s the only brokerage firm where you can use as someone outside the United States to trade in the U.S Stock Market.
- Charles Schwab: is a full-service brokerage that provides its traders and investors with an extensive selection of valuable tools. With Charles Schwab, you get stocks with 0 online commissions, ETF trading (exchange traded fund), and a $0.65 per Options contract.
- Fidelity Investments: In 2020, Fidelity Investments was rated as the best online broker, depending on the ease of use, customization, insights, and functionality. Fidelity is considered a powerful platform in the online brokerage world, offering competitive features, costs, and quality. Considered one of the largest brokers in the U.S, Fidelity offers excellent trade executions with precise research and asset screeners. Actually, around 96% of customers’ orders are executed at much better prices than NBBO (National Best Bid and Offer). They help their customers’ trading process with no account fees, ETF trades, $0 commission trades, and $0.65 per Options contract.
- TradeStation: is an experienced platform specialized in trading strategies, utilizing superior charting and analysis tools. In 2020, TradeStation reported 99.999% uptime even during high volatility periods. The platform is more aimed at intermediate-level traders who want to improve their trading skills. They have multiple account pricing plans. With TradeStation, you get $0 stocks and ETF trades, $0.60/contract, and $0 trade options on TS Select. Also, you get $0.5/contract and $0/trade.
Best Penny Stocks To Buy?
Onto the question of anyone getting into stocks, “how do i know the best stock to invest in?” That’s not a simple question at all, so don’t feel discouraged if you don’t know where to start.
- For one, an easy step to start with is to listen to the street buzz. Which means, one should be on the lookout for internet influencers, Youtube channels, Telegram groups, Discord servers, Investors Ihub, and so on. In short, the streets of the world wide web. If you are a bit confused or just starting out you can also subscribe to our free email list to get our daily and weekly stock picks, we’ll get all the leg work done for you.
- A crucial pathway to getting one to decide the best stock to invest into, is doing your research and due diligence. Research is king, and doing your research or due diligence when looking for the best stock to invest in is a big leap into making the right decision. When doing your due diligence it’s better if you start with the fundamentals, meaning starting with researching the best websites for stock market analysis, information, and latest news. Such as, Yahoo Finance, Investors Ihub, Investopedia, OTCmarkets, and PennyStocksToday. You must also be careful of fake news, because there’s a lot of it out there. You can get past that by looking up multiple websites and not taking your information from just one.
- While doing your research, it’s best to look for catalysts. One doesn’t have to be an expert in the stock market to know a catalyst when he/she finds it. When thinking of catalysts, think of what would make a company achieve more success. Whether it’s business, societal, or environmental. Some examples of catalysts could be: a company entering into a merger, a new acquisition, opening up a new branch, doing community work, announcing a new supply of in-demand products, an investment from a house-hold name person/entity, Etc.
- Price volatility is how much or to what degree does the price of a stock fluctuate. If a stock’s price rapidly goes up and down it means it’s highly volatile. Highly volatile stocks are very high-risk, meaning one could either win big or lose big. High risk-tolerant investors usually go for highly volatile stocks. It’s usually best for beginner traders to go for stocks that are almost in the middle. Not too volatile, yet also not too stable.
- Checking the volume should also be amongst your most important tasks when doing the research. The volume of a stock refers to how much it’s being bought and sold. If there’s a high number of transactions it means the stock has a high volume and vice versa. Like the price volatility, it’s best to go for a stock with the middle part of the cake. Not too much, yet not too little a volume.
- Must insure the company has a favorable liquidity ratio is a ratio that determines the company’s ability to use it’s current or quick assets to rid itself of its liabilities or short-term debts. For example, if a company has $50 million assets and $100,000 debts, it’s considered to have a favorable liquidity ratio.
- Finding out the liquidity ratio will also help the trader determine how much debts this company has on its hands. A lot of debts is a big no-no when looking to invest in stocks.
- Choosing the right time of the day plays a factor when deciding how to best know the best stock to invest in. Many people believe that there are “Power Hours,” where trading can be most successful and efficient. Usually, they are between 9:30 & 10:30 am and 3 & 4 pm.
When to buy or sell your stocks?
One last thing to be aware of when getting into the stock market, is knowing when to sell and when to buy. Don’t be too greedy, do not waste the chance of selling a stock that has risen to a solid price just because you think it could go higher. What you can do instead is have a clear plan and target price based on your due diligence. If you’re expecting more growth than anticipated, don’t get greedy, take your profit and let your initial investment ride.
Moreover when buying, never use anything other than your “play money” to trade with, especially when you’re just starting out. No job paycheck money, rent money, none of the essential day-to-day needs. Have a certain amount on the side you can trade with that won’t affect the livelihood of you or your family if it disappears.
In conclusion, the stock market and trading can be a great way to learn, create and make use of opportunities, and of course make a lot of money. But as per mentioned, you can lose a lot of money too. So if you’re about to start trading you will need to be prepared. Welcome to the magical world of the Penny Stock market.