What are penny stocks? They are just normal stocks with a difference. In this article we will discuss what penny stocks are, the advantages of trading in these kinds of stocks and strategies you can use when investing in penny stocks. If you have ever thought about becoming an investor but were worried about not having enough investment capital, then you need to read this article.
Before we do, it’s worth noting that while this article is about Plus500, they are not the best place to buy penny stocks. In fact, we have had lots of issues with them and can no longer recommend. Instead, get yourself an account with FXPro and get a free £20 when you do.
Penny Stocks with Plus500
First off, penny stocks are normally traded stocks on the stock market. The biggest difference between penny stocks and blue chip stocks, like IBM or banking stocks, is simply the price. Penny stocks tend to be company shares from smaller companies, startups, mining firms and small technology consortiums. They trade around the penny up to the few dollars point.
Because the price per share is so low, almost anyone has investment access. You don’t need hundreds of thousands of dollars in order to invest. Sometimes as little as a few hundred dollars will get you started with a batch of up and coming pennies.
Penny Stock Trading with Plus500
Plus500 is a Contract for Difference (CFDs), Forex, Stocks, Commodities, Options and Indices broker, with authority to conduct operations in Europe, Asia, Middle East and Australia through its subsidiaries- Plus500UK Ltd, Plus500AU Pty Ltd and Plus500CY Ltd. At plus500, penny stocks are categorized according to their country, making it easier for traders focusing on specific regions.
Some of the Advantages of trading Penny Stocks with Plus500 include;
Penny Stocks Provide A Much Higher Profit Potential Than Other Stocks
This part is a no brainer and it is the biggest lure for trading penny stocks. They have far more profit potential than “traditional” stocks like the blue chips which have already been priced out to the maximum and are no longer in their growth phase. Even when a blue chip announces something brand new and exciting or comes out with a really great quarterly report, the movement is tiny compared to what you can get from a quality penny stock.
You Can Make a Sizable Profit Very Quickly
Penny stocks have a very different time table from traditional stocks. It is quite reasonable to expect very quick profits. In fact, in less than a day to only a few weeks it is common to see a 15% – 100% return – and an even higher return happens often enough that it’s not THAT surprising when it happens. I know this may sound almost too good to be true if you have never traded penny stocks or you are accustomed to the pace of the traditional market. However, it is actually very common to be able to lock your penny stock profits within days.
You Can Be the “Cool” Investor On the Block
Trading penny stocks isn’t traditional in any way so if you trade them you can be that “cool” investor using “taboo” methods that no one else uses – and you can impress your friends and family by making more money with these “crazy” techniques than what anyone else makes with more traditional methods. Trust me, if you are trading pennies (and doing so wisely) and your friends are trading in the more traditional way, they will all be eventually coming to you wanting to know your secret because you will be making FAR more than they are making.
The Best Penny Stock Deals Are Grossly Undervalued
You can think of the penny stock world like shopping in a bargain basement with price tags that have been slashed 50%, 75%, 90%, etc…. There are incredible deals all around and all you have to do is figure out which of the items are high quality.
Quality Penny Stocks Outperform the Blue Chips By a Long Shot
You know human nature can be funny sometimes. It doesn’t matter what FACTS are staring investors square in the face, they’ll still overlook the obvious and buy into whatever the “conventional wisdom” happens to be – which in the financial world tends to me what the “big financial boys” tell us it is. Okay, call me a rebel if you want but the facts show that quality pennies (excluding all the obvious scams on the pink sheets) outperform the blue chips by a long shot and they have been doing so for decades.
While there isn’t a reliable “penny stock index” per se, there are very reliable “small cap” indexes we can study (which represent approximately the bottom 3% of all stocks on the big exchanges which includes many pennies). Studying the difference between the S&P 500 vs. S&P 600, for example,clearly shows that the small caps outperform the big caps (including the infamous blue chips) for decades. In fact, this is even more true for during hard times like we’re having now. If you pick and chose the best small caps/penny stocks, you can come away with incredible bargains and really make a killing in a very short amount of time.
Penny Stocks Investing Strategies
Cheap Stocks On Major Stock Exchanges
By common definition the shares of penny stocks are trading below $5. There are really many stocks like that on major stock exchanges, like the New York Stock Exchange (NYSE), NASDAQ or AMEX. Trading these penny stocks is just as safe as trading any stock on these exchanges. Stocks listed on major exchanges have to undergo very strict reporting requirements, so you can be sure those companies mean business. They are not some shell companies started for whatever dubious reasons, but established businesses with a past and a future.
All this may seem safe enough, or at least not riskier than regular stock trading. However you have to consider one major drawback before deciding to follow the path of trading cheap stocks on major stock exchanges.
Companies that want to be listed on NYSE, NASDAQ or AMEX have to pay astronomical listing fees. So, penny stocks you find on these exchanges are probably not small companies just starting out in hopes of making it big. Most probably they are once large companies, whose share price plummeted because of financial troubles or some other dire reasons. Just take Sprint (S) for example, listed on the NYSE. In the year 2000, at the peak of the dot-com craze, the share price of Sprint went to $75, only to reach the lows of $2 in 2012. As of July, 2016 it is trading at around $4.62.
Your main job when utilizing this method is to find out why a certain penny stock is trading on such a low share price. You have to believe in your chosen stock, that despite the bad times it can still soar in the future.
Stocks On Over-The-Counter Markets and Pink Sheets
On over-the-counter (OTC) markets and Pink Sheets you won’t find companies that were once big but have fallen from grace. These penny stocks are usually really small startups with a share price below $1. There are thousands of them, and you cannot ignore the research necessary to filter out those 95% of them which are useless. OTC penny stocks have other kinds of risks altogether.
They are extremely illiquid. Not many shares are traded daily, so if you buy a stock on an OTC market, later you may find yourself in a position that you simply cannot sell it for profit, because of the low volume and a large spread between the bid and the ask price. You won’t be able to find a buyer.
The other risk is that the great majority of stocks on OTC markets are really low quality, junk stocks, and only a few of them are worth further research. Knowing how to find the good ones is the key point.
Ride The Pump And Dump
This is unquestionably the most dangerous strategy. Penny stock trading gets all the bad press primarily because of the pump-and dump schemes.
Pump-and-dump is a very common and unethical (even criminal) activity where scammers buy up the majority of shares of a low quality OTC penny stock, and then they promote it heavily, so that gullible investors buy the stock too, thereby driving up the share price. When the share price has rocketed, the fraudsters simply sell their shares, causing the immediate collapse of the share price, leaving the investors with a worthless penny stock, unable to recover.
The question then is can you profit exploiting this fraudulent activity. There are two ways. The first way is probably unethical, but the second way will make you the king of penny stock trading.
The first method is to identify a pump-and-dump scheme as early as possible, and get in while the share price is still rising. Even more importantly you will have to get out before the share price collapses. In other words, you are doing exactly what the scammers are doing with the stock, only with much less information. This, of course, is a very risky strategy, and probably an unethical one, because – if you are successful – you are clearly taking the money from the victims of the scam.
The other much more exciting technique is to short the pump-and-dump penny stock at the exact moment, when you are sure the share price has reached its peak and the collapse is imminent. This is how Timothy Sykes, the famous penny stock millionaire made $3 million out of $12,000 in a couple of years. If you are good at technical analysis and have access to appropriate research tools, you can screen for possible pump-and-dump penny stocks and go against the crowd by shorting them.