In the world of stocks and trading, few words can strike the same balance of anxiety as “penny stocks.” The definition of the penny stock is somewhat ambiguous in today’s market. Although many investors assume that a penny stock is any stock they can purchase for a penny, the truth is that most securities aren’t available for a price that’s that low. The changing nature of the market and interest levels means that the best penny stocks are at least $5 each, though some can be less expensive. The SEC or securities and exchange commission vaguely defines penny stocks as low-priced securities that are speculative, and don’t necessarily sell on the big stock exchanges. The question is, how do you use penny stocks in your trading portfolio?
Start with a Basic Stock Screener
The first thing you need to know when it comes to trading penny stocks is where you can find cheap stocks to trade. Some investors automatically start seeking out forums and message boards, but this is rarely the best way to get a great pick. Instead, it’s a good idea to opt for a basic screener that you can use to sift through companies that are selling stocks but might not have a listing on a standard stock exchange. The “Over the Counter” Markets is one particularly popular screener with nearly 10,000 securities to choose from. Stock screeners help you to filter through stock options based on their cash flow, dividends, growth, revenue, earning, and intrinsic values.
Examine Resistance and Support Chart Levels
Technical analysis is rarely the most beloved part of stock trading. Some people believe that technical analysis is a convoluted and complex way to find a stock’s value. While that is true in some cases, if you’re new to chart trading, it’s worth looking at simple analysis strategies like:
- Resistance levels: When prices can only rise so far before they begin to fall again, this is known as resistance.
- Support levels: When your shares reduce a certain amount before they begin to bounce to a higher price, this is known as a support level.
Most experts recommend that individuals playing with penny stocks should buy when a stock is in its “support” level and sell before it reaches resistance.
Look at Liquidity
Finally, some penny stocks will only trade a certain number of shares a day, while others will trade thousands in the same 24 hours. It all comes down to the liquidity of the stock. It’s worth multiplying the number of shares available to determine how liquid a company is by the price to see how much money is moving through the company on a daily basis. Most of the time, the penny stocks available on major exchanges will be more liquid than those over the counter, or on Pink Sheets. Usually, it’s helpful to make sure that the stock you choose comes with enough liquidity to ensure a fair price on average.