Penny Stocks Trading
You will almost certainly have heard of penny stocks, they have after all been a part of stock trading for over 200 years. Penny stocks is a title that originated in the US, but in the UK you may know them as penny shares and in some countries, they are called cent stocks. They are all the same thing, low-value company shares, made available for purchase by investors.
Penny stocks are a perfect asset for day traders because they are far more suited to fast trading transactions rather than buying and holding onto the shares in the way that some investors buy stocks in major companies. There are some downsides to them, they are particularly volatile, open to manipulation and have in the past been used for major frauds.
One thing you can to do protect your investment from predatory scammers is to trade only with a well-regulated, reliable broker. Finding the right broker can be a tough task, but that is something we can help you with. Our in-depth broker reviews cover every aspect of the operation and we only add them to our recommended list if they are legitimate and show evidence of providing a great trading experience.
In this article, you will learn:
- Why penny stocks are great for day traders
- The things to consider before starting trading
- How to avoid the various day trading scams
What Are Penny Stocks?
Penny stocks are company shares which are ‘floated’ on the stock exchange and available at very low cost. There may have been a time when they did cost a penny, but in modern times, the generally accepted value is under £1 or $5.
Penny Stocks Basics
Penny stocks are shares of companies that you buy and sell, when you invest you own the number of shares you purchase. Not to be confused with CFDs, where you effectively ‘gamble’ on a price difference, but do not gain ownership of the underlying stock asset.
The Stock Markets
On the major stock markets you will find major listed companies and often hear about them on the news, the Dow Jones, Fortune 500 etc. Company shares that are not on any list are traded as mid-cap or penny stocks via minor exchanges like the Alternative Investment Market (AIM) section of the London Stock Exchange (LSE).
By their very nature, penny stocks have two inherent characteristics, low liquidity and high volatility. Therefore, small market movements can result in radical price fluctuation. In short, this means that whilst it is possible to ‘pick a winner’ and reap big rewards, it is just as easy to make a big loss.
Brokers And Buying
Penny stocks are an OTC product, purchased from exchanges, so you need a broker to carry out the transactions for you. A lot of brokers avoid penny stocks, so even if you already trade binary options or Forex, it is quite likely that you will need to find another broker.
Trading Pros And Cons
The type of stock you will see listed on the world’s major stock exchanges (like the LSE or NYSE) is commonly referred to as ‘blue chip’ stock. This is high-value stock from some of the world’s biggest companies, generally priced for wealthy investors who often buy and then hold the stock for long periods.
There are substantial differences between these and so-called penny stocks, which are available only on minor exchanges like the AIM (Alternative Investment Market) via broker services. The majority of penny stocks are from unknown, newly-established businesses and are the complete opposite of blue chips in that they are low-cost options which are best bought and sold over shorter periods.
Naturally, these characteristics are what make them a great opportunity for day traders to invest in. However, the penny stock market is much less liquid, meaning that any buying or selling instantly reflects a visible price fluctuation. This makes it doubly important to know exactly when to sell, even if it means a loss; a very strong trading strategy and high concentration levels are essential attributes if you intend trading.
Penny Stocks Tips
Defining a set of tips for traders is always a difficult task, but for this subject, there are enough to fill a book (there are plenty out there to prove it) and some will apply more to some of you than others. However, the list below is the ones we feel will help you the most:
When you first look at day trading penny stocks, you may well experience that ‘kid in a sweet shop’ moment, but always remember that there is research to be done before you start investing randomly. You should also consider utilising robot trading software as the benefits can be significant.
Finding the right broker can be a tough task, but that is something we can help you with.
Which Broker to Choose
There has been a considerable amount of controversy surrounding penny stock trading in the past and you may already be aware that there are more scams in operation where penny stocks are concerned than with any other form of trading. Because of this and the fact that it is a difficult market to trade in at the best of times, the last thing you want to worry about is the reliability of your broker.
Whilst we cannot remove the high-risk element of day trading penny stocks, what we can do is provide you with a list of brokers that we have carefully reviewed ourselves and are happy to recommend to you. Our review panel is made up of time-served traders and financial experts who know exactly what to look for and what separates a mediocre broker from a great one.
Top of our list is the broker’s licensing and its performance under regulation, closely followed by adherence to strict website security and data protection protocols. We like to see a robust and responsive trading platform on offer, with equivalents for mobile devices, plenty of educational guides and a clearly defined fee structure, so that you can see the true cost of trading. Last, but not least, we test out the customer support network to ensure that if you ever have an important query or a problem, you will be looked after.
Are penny stocks legal and safe?
Whilst it is legal to trade in penny stocks, there are a lot of potential pitfalls and scams. We recommend you only trade with a regulated broker.
Can I trade without downloading software?
This depends on the trading platform the broker operates and if you intend trading on the move, you will need to download an app to your device.
Do I need to pay fees and taxes on profits?
The trading fees you pay will vary between different brokers, so always check T&Cs. You will also need to keep trading accounts, in most countries your profits will attract income tax.
Is penny stocks trading hard or confusing?
It is no more difficult or complex than any other form of trading, provided you have acquired a sufficient level of knowledge before you start.
Can I test brokers before using real money?
The majority of brokers offer a demo platform or simulation to try your hand at trading before you invest. Some are time-constrained though, so always check first.
Charles has worked at brokers since he finished his studies at university. Starting as a Junior Trading assistant and progressing into a Business Development we’re delighted that he’s been part of the team since 2015.