Blog : Starting from Scratch in Penny Stocks

by Peter Leeds on March 9th, 2015

 

If you have never traded penny stocks, or are still learning, here is how to proceed.

You Need a Broker:

To trade any type of shares, you will need a discount broker.  Click here to see our official review of all the brokers for trading penny stocks.

Opening an account is simple, and typically can be done online in minutes.

You will need to deposit money into your online brokerage account.  This will be the money you use to buy shares with.

Each time you buy or sell a stock, a commission fee (usually around $9) will be taken from your funds.

Choose a discount broker which appeals to you.  Each has different:

• minimum account balance requirements
• commission fees per trade
• online tools
• customer service
• extra fees to trade penny stocks
  

=== Steve only has $500, and wants to trade penny stocks.  A broker like LowTrades (for example) make sense for him, since they have lower commission charges than most other brokers, and there is no minimum amount required to open an account. ===

You Need to Know Which Penny Stocks You Want to Buy:

Consider which sources of information you will follow in order to get ideas for penny stock investments.

Beware!  Understand "the 3 Don'ts" of penny stocks:

• Don't follow free stocks picks (whether from your uncle, a tip at work, or on an online forum)
• Don't trust free newsletters, web sites, printed mailings
• Don't buy Pink Sheet or OTCQX penny stocks
  

Click this link and this link if you need to understand why.

You will either get penny stock selections from a trusted source, or you will learn to find and analyze them yourself. 

Ideally, you should do both - get great companies from an excellent, reliable source, and then put those selections through your own review.

You can learn more about how to do research and analysis for yourself at some of these links:

• Books by Peter Leeds
  
• Straight Facts about Penny Stocks 
• The Official Penny Stocks Blog
  

Watch (but don't follow or believe) the mass media.  If you do, you will get whatever everybody else gets.  In other words, you would have either:

- gone broke on Bitcoin, Dutch Tulip Bulbs, and Marijuana penny stocks, or...
- have attained 4% per year on boring "safe" investments

 

=== Steve finds an expert who he feels is honest and great at what he does.  Until he learns how to analyze penny stocks himself, he decides to lean on his or her analysis. 

Steve does not buy the first few penny stocks they suggest, but instead watches and waits to see how their picks perform.  Meanwhile, Steve avoids following the crowd who are guided by mass-media and the most popular shows, newspapers, and magazines. ===

 

You Need to Know How to Trade:

You can quickly learn to trade here, or with the learning tutorials which your broker should provide.

With penny stocks, typically you should use 'limit' orders, rather than 'market' orders.  We explain why, and the difference here. 

 

=== Steve speaks to his broker, or learns online all the details of how to trade a stock.  He doesn't actually buy yet, but he makes sure he is comfortable with the very simple process. ===





You Need a Game Plan:

Don't just 'buy' some penny stock and hope it does well.  Instead, take a breath, take your time, and decide what your goals are.  (See step 5 at that link)

Be realistic - do you want to turn $100 into $5 million?  We can't help you.  However, maybe you want to use some risk money, and are planning on doubling it in the next year.  That can happen.


== Steve has $500 of risk money (cash he can afford to lose).  He hopes to turn it into $1,000 in the next year by trading penny stocks.  Steve now has a broker he will trade with, he knows the source of information he will trust, and understands how to buy shares of any publicly-traded company. ===

Before You Trade:

We know you want to sink actual cash into a real penny stock right away.  However, before that first purchase, no matter how excited or impatient you feel, you should always Paper Trade, so you have zero risk, and will learn faster. 

Once you see how your investment(s) would have done, you will know what would have happened if you had used real money.  You either need to:

• adjust your approach, or...
• you have proved that you are on the right track.

 

=== Steve keeps track on paper of 6 penny stocks he likes.  He records that he would have invested $250 into ABCD penny stock, and $250 into WXYZ penny stock, and the price of shares on that date.  Steve watches all 6 penny stocks for a couple weeks, then gauges how his investments would have done if he used real money. ===




Your First Trade:

Typically, you would enter your trade order online with your discount broker's website.  You will need to know:

• The name of the penny stock
• The ticker symbol (1 to 5 letters) which represents the specific stock
• The market the penny stock is trading upon (NASDAQ, OTC-BB, NYSE, AMEX...) [Read bullet point 1 of this]
• The latest price for the shares
• The price per share you are willing to pay
• The amount you want to purchase
  

You enter the trade order with your online broker's site, and it should go live as soon as you submit it.  

If the shares trade at or lower than the price you bid, then you should get the shares. The cash cost of the purchase will be taken out of your online account, while the shares you bought should now show up.

Congratulations!  You have just bought a penny stock!

As the value of the shares increases, your trading account will adjust to reflect the asset growth.  As the value falls, your account will also reflect that downward move.

When you want to sell, it is simply the same process as buying, only you enter your trade to "sell."  The proceeds from the sale will show up in your online discount brokerage account as cash, while the shares you sold will no longer display in your account.

Remember:

• You can adjust your limit price any time the order is active.
• You will pay a commission fee for every day that part of your order gets traded.  (Buying 8,000 shares one day, 2,000 of the same stock the next = 2 Commissions) 
• Take responsibility for your own decisions.  Even the top experts are wrong much of the time.

 

 === Steve logs in to his discount broker's web page, and enters his trade order.  He provides the details required:

 

• Ticker Symbol (ie- IBM, PVAT, MCD, ABT...)
• Market the shares are trading on (ie- OTC-BB, NASDAQ, etc...)
• Buy (or sell...)
  
• How many shares (ie- 1000 shares)
• Price to buy the shares (ie- $0.27)
• Duration (ie- day order means the order is valid until markets close, or until the order is filled) 

Steve clicks 'submit' and watches as 850 shares are sold to him at 27 cents.  That leaves only 250 more, and he will get another commission charge if he buys them tomorrow.  To avoid the extra commission, he increases his bid price to 29 cents.  He ends up getting those shares at 28 cents, to complete his order for 1,000 ABCD.  The stock now appears in his online discount broker account, which now also shows about $270 less cash. ===

If any of this seems confusing, that's just because it is new to you.  The process is as simple as online banking, and if you get leads from trustworthy, reliable sources with an excellent track record, then you are ahead of over 90% of other investors out there.