Ways To Get Exposure To Penny Stocks
With us, there are two ways to get exposure to penny stocks: investing and trading. We offer a wide variety of small-cap stocks, especially on our share dealing platform.
Investing
If you want to invest, you can do so using a account. Investing in penny stocks makes you a shareholder, and youll receive voting rights and dividend payments . Youd have to pay the full value of your investment upfront. As for possible profits youll only make money if you sell your shares for more than what you paid, but your losses will be capped at your initial outlay.Open an investment account to get started
Trading
If you want to trade penny stocks, youd use financial derivatives like spread bets and CFDs. Derivatives enable you to speculate on penny shares without owning them. You can go long if you think the price will rise, or go short if you think itll drop. Youll open your position using leverage, which means you only need to put down a deposit while still getting exposure to the full value of the trade.
Note that leverage magnifies your risk, as any profits and losses will be based on the full position and not your deposit. You should always take steps to manage your risk.
Open a spread betting account or a CFD trading account
Best Brokers For Penny Stock Trading Of January 2022
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The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.
Penny stocks are risky investments, though they dont actually cost a penny. They are shares of small companies also known as microcap stocks that trade outside of major stock exchanges, and brokerages may charge additional fees to trade these often volatile shares.
Some brokers add a surcharge to stocks that are valued at less than a certain dollar amount, or don’t extend their free commission offers to unlisted stocks. The definition of penny stocks will also vary by broker. Some consider anything trading under $5 to be a penny stock, while others put the cutoff at $2 or $1.
For the purposes of this roundup, we limited our selection only to brokerages that give traders full access to over-the-counter stocks on the OTC Bulletin Board.
Bottom line, there are plenty of other ways to expose your portfolio to stocks without ponying up a high share price here are a few suggestions.
Choosing a penny stock broker
Have A Solid Trading Strategy
Now I get more questions about trading strategies than anything else it seems and this is the best advice I can give. Pick one and stick with it.
If youre even a little bit of a basketball fan, youll remember Michael Jordan the greatest player in the NBA. What many fans dont realize is for a time he tried to become a pro baseball player too.
It didnt work Michael Jordan sucked at professional baseball.
Having a strategy to trading penny stocks online is critical and youve got to pick one and know it inside out.
You can make money as a growth investor, or value investor, or dividend chaser, or turnaround specialist, or technical analyst. The ways to make money are limitless but youve got to be good enough to know that investing strategy cold.
Let me say that again know your strategy cold.
Be a pro at one thing and let the amateurs jump from strategy to strategy.
Now, with trading penny stocks, you cant win with strategy alone. Youve got to
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Why Trade Penny Stocks
If you decide to trade penny stocks, you need to do so with eyes wide-open. Despite the risks, some investors are drawn to penny stocks for the chance to earn big profits with just a small investment. Who doesnt love a good investing success story?
Lets say you bought 2000 shares of a penny stock trading at 46 cents per share. Thats a $920 investment in that penny stock. If that stock happens to reach $1 then youll have more than doubled your initial investment.
To get that elusive 10-bagger the stock would need to reach $4.60. If that happened, then your initial $920 investment would now be worth $9,200.
Still, the more likely scenario is the share price stays under $1 and possibly goes to zero if the company fails.
The extreme risk and volatility of penny stocks mean investors need to do their homework before making an investment. Rather than trying to hopelessly pick one winner, a better strategy might be to take the venture capitalist approach and divide your investment among 5-10 penny stocks diversifying your risk and increasing the chances of finding the elusive winner.
Be extremely wary of any online newsletter promoting the best penny stocks to buy in Canada. As mentioned above, theres no way to tell if the information is biased and/or part of a scam to promote a particular stock to benefit someone who already has a position and is waiting for you to buy so they can unload.
Can You Make Money On Penny Stocks
It is possible to make money with penny stocks. Then again, its technically possible to make money with any type of stock. Successful investors usually focus on the potential for their stock picks, regardless of price, to gain value over the long term.
There are plenty of good reasons to invest in small companies. Investors who buy shares in fast-growing companies that are still small capture a lot more share price upside than those who wait to buy stock until the companies have grown into giants.
However, penny stocks are almost never the bargains that they appear to be. Their shares are cheaply priced for good reason. At best, penny stock companies are unproven and small with dubious long-term prospects for success, and, at worst, the penny stocks themselves are vehicles by which con artists take advantage of unsuspecting investors.
Many penny stocks are traded so cheaply because the businesses behind them aren’t worth much more than that.
Tom and David Gardner, Co-founders, The Motley Fool
Penny stock investors often erroneously think that a low share price indicates that the company has greater potential to grow than those with higher share prices. In reality, the valuation of a company — also known as its market capitalization — is determined by two factors:
- The stock price
- The number of shares outstanding
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How Does Penny Stock Trading Work
The main premise of penny stock trading works much like other investment scenes. That is today, you will be looking for an app to buy penny stocks and then sell them at a later date more than you initially paid. If you are able to do this, you will make a profit.
With that said, experienced traders will look to buy and sell penny stocks on a short-term basis. This is with the view of making small but frequent gains throughout the trading day.
A great option for short-term penny stock traders is to use a platform that supports CFDs. As we noted earlier, this gives you access to leverage and short-selling capabilities.
Best For User Experience: Td Ameritrade
Penny stock traders will enjoy a TD Ameritrade account with no minimums or recurring charges, no commissions for non-OTC stock trades, and the choice between multiple high-end trading apps for both passive and active traders. However, there is a $6.95 fee for trading over-the-counter stocks, which could drive up the costs of your penny stock trading plans.
TD Ameritrade customers can choose between the traditional TD Ameritrade online experience and mobile app, and the premier thinkorswim experience. The regular TD Ameritrade app is great for beginners and passive investors. thinkorswim, available for both desktop and mobile, gives you arguably the best active trading experience of any major discount brokerage.
Charles Schwab acquired TD Ameritrade in late 2020, and its likely that TD Ameritrade platforms and Charles Schwab platforms will be combined into one in the near future.
- Account minimum: $0
- Online stock trade commission: $0
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No trade commissions or required account fees
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OTC trade fee of $6.95 per trade
-
Recently merged with Charles Schwab
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Special Penny Trade Restrictions
Some brokerage firms wont even let you trade in penny stocks online. You have to place a phone order. In other cases, they may limit the types of orders you can make with a penny trade.
While you probably arent looking to waste too much time thinking about strategies, you should only work with brokers who let you trade penny stocks in the same way you would other stocks.
Risks And Benefits Of Trading Penny Stocks
There are multiple benefits of trading penny stocks. Because these stocks are priced under $5, there is a limited risk. The most you can lose is $5. By choosing the right stocks, however, you have access to an unlimited upside. Though they are rare, instances of stocks rising from $1 to $100 within a month are not unheard of.
Penny stock price movements are usually more volatile than normal stocks. For day traders, this means there will be multiple opportunities for profit within a given trading period. Even if a stock only moves from $0.20 to $0.30, this is still a 50% increase in value.
Another benefit of trading penny stocks is that unlike stocks listed on the S& P 500, penny stocks are loosely correlated with the market as a whole. Even if the entire economy is undergoing a recession, there will still be penny stocks rising in value.
There are drawbacks to trading penny stocks. Many of these companies have very little value, which is why they are priced so low to begin with.
The majority of penny stocks will remain penny stocks for life. Furthermore, because they are often traded over the counter and with little oversight, these stocks are a prime target for pump and dump or insider trading schemes. Still, when managed correctly, trading penny stocks can still be quite profitable.
Lets dive into how to find penny stocks using this smart, simple strategy.
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Which Penny Stocks Are You Watching Right Now
If youre looking for the best penny stocks to buy, there are plenty of options to choose from. But, with so much impacting the stock market right now, investors need to stay as up-to-date as possible with everything going on. Considering all of this, which penny stocks are you watching right now?
If you enjoyed this article and youre interested in learning how to trade so you can have the best chance to profit consistently then you need to checkout this YouTube channel.
Is It A Good Idea To Buy Penny Stocks
Here are five tips to remember when buying penny stocks:
- They are risky – Penny stocks trade for less than $1 per share for a reason.
- Be aware of fraud – Watch out for pump and dump schemes.
- Be mindful of paid promotions – Ignore emails claiming big returns they are a scam.
- Do your own research – Thoroughly research the company before you buy.
- Be aware of costs – Select a broker with flat-fee trades.
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How Do I Buy Penny Stocks In Canada
The first box you need to check off if you want to invest in penny stocks is the ability to handle significant volatility. If you don’t think you can stomach the risk, simply head to our how to buy stocks page to get started investing in the major exchanges.
What I like to tell investors looking to start trading the pink sheets, is to set aside an amount you would be completely comfortable losing. I wouldn’t recommend anyone invest their whole portfolio into penny stocks. But a designated amount, say 10% of your total portfolio, is completely reasonable.
Once you’ve allocated some capital towards what I like to call “fun investing”, you’ll need a brokerage account.
If you already have one, you’re ahead of the game. If not, feel free to check out our Questrade review. In my opinion, they are the best brokerage to start with if you’re looking to invest in penny stocks.
Buy And Sell Stocks Commission
This article is provided for informational purposes only. It does not cover every aspect of the topic it addresses. The content is not intended to be investment advice, tax, legal or any other kind of professional advice. Before taking any action based on this information you should consult a professional. This will ensure that your individual circumstances have been considered properly and that action is taken on the latest available information. We do not endorse any third parties referenced within the article. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only.
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Wealthsimple Trade is offered by Canadian ShareOwner Investments Inc. , a registered investment dealer in each province and territory of Canada, a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund , the benefits of which are limited to activities undertaken by ShareOwner.
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Also Important: Be Sure You Research The Company
Not all companies are created equal, and its important to know as much about the company as you can before investing in it. You will really want to research company management, their financial reports, and do as much as you can to learn about the company and make sure that its the right one for you.
Now that weve gotten some tips for how to identify the high volume stocks and how to choose the industries that you think are going to be hot, you are ready to buy and trade penny stocks online.
Commit Time To Research Your Penny Stock Ideas
Finding stock ideas isnt enough.
Youve got to look into each company and uncover the good, the bad, and the ugly. Its called doing your due diligence.
And youve got to do it on your own. You never want to trust due diligence to others. Take the time to read about the company. Visit their website, read their press releases, study their government filings, analyze their financial statements.
Youll be shocked at what you uncover from your study
And youll quickly learn how to identify great companies!
Now I cant cover how to do your due diligence here that could fill a book. So keep an eye out for future articles on how to perform due diligence on penny stocks.
What you need to know is, it takes time and its not something you want to rush. Youre better off taking your time and doing the research and missing a move, than investing in something you dont know about and losing all your money.
Remember, learning how to invest in penny stocks online is a process and it takes time.
Once youve found a great trade and have done your research, the next step is simple
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Unusual Volume In Penny Stocks
One of the first things youll want to identify is stocks with irregular or above-average volume. This method allows you to more or less follow the money because when theres unusual volume, theres typically an unusual event that could act as a catalyst. For instance, certain penny stocks may hit a scan for unusual volume even if the company itself doesnt have any news. This would pertain to something like industry-related news.
For instance, when cannabis was legalized in Canada, most of the marijuana penny stocks broke out big. Not many attested that to their own news but rather the sector move in response to the big industry news. Sometimes, unusual or high-volume penny stock screeners can pick up on the groundswell before the average Joe investor puts the puzzle pieces together.
Narrowing Down Trading Candidates
Now that you understand where to trade penny stocks, the next step is to determine what stock to trade. One popular method is to use stock screening tools, such as the one found on the OTC Markets website or Finviz. Screening for stocks with a price under $1 is the easiest way to narrow down the trading universe. From here, you can filter the list down further depending on your strategy and risk tolerance. Maybe you are only interested in penny stocks that conduct business within the sector of drug manufacturing, for example. In this case, youd make the necessary adjustments and then run the filter.
Once you get the hang of using Finvizs stock screener, your list, based on the filter above, should look something like this:
| No. |
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Pattern Day Trader Rule Aka Pdt Rule
What is the PDT rule?
If your margin account does not have a value of at least $25,000, then you are bound by the Pattern Day Trader or PDT Rule. This rule restricts you from placing more than 3 day trades within a rolling 5-day period. If you violate the PDT rule, a broker can restrict your account from placing any day trades or even restrict it to closing transactions only for a certain period of time.
But there are ways some traders can seemingly make endless day trades without violating the PDT rule. Those with less than $25,000 without margin enabled also known as a cash account arent bound by the PDT rule. The caveat is that they can only trade with the amount of settled cash in their account and theres no leverage or margin. In light of this, you should know when funds from certain types of trades settle.
For example, many brokers have a T+3,T+2, or T+1 on certain trades. TD Ameritrade, for instance, has T+2 on stock trades and T+1 on options. This means T or trade day plus 1 or 2 days for your cash to settle. Regardless, ask your broker for available options on account type during the sign-up process.
