Tips for Trading Penny Stocks

Penny stocks are regularly cited as one of the most dangerous investments you can make. The regulations penny stock companies face isn't always as strict as bigger companies, and since they are small-cap companies with tight profit margins, going bankrupt is far more likely,

However, with great risk comes great opportunity—or so the saying goes. If you want to make a big paycheck, it could be very possible with the right penny stock portfolio. After all, if a stock worth ten cents goes up three cents, that's a 30 percent return.

Getting the right portfolio and knowing what to do with it, though, is the hard part. While most people will advise against penny stocks under any circumstances, these tips for trading penny stocks will definitely help those who want to give risk a shot.

One of the best tips for trading penny stocks is to lower your costs. A single "standard" trading fee of $4.00 is literally worth as much as 400 shares or more of the penny stock of your choice. Think about that!

If you want to maximize your profits, you are better off downloading a fee-free trading platform like Robinhood. No fees means more profit—or at the very least, less loss. That's one of the reasons why it's one of the best broker apps on the market.

It's also worth pointing out that Robinhood seems to "vet" penny stocks, which means that very poor reputation stocks probably will not stay on the platform. It's a good way to improve your selection easily.

Due diligence still matters.

The easiest way to lose money on the stock market is to just invest at random without any idea of who you're investing in. Before you put money down on any stocks—penny or otherwise—do a little bit of research.

One of the smarter tips for trading penny stocks is to look at the numbers behind them. Penny stocks do not have as much regulation, so this means that there will be less proof of what's going on in the company than what you could expect to see with regular stocks.

Use your company sense. A penny stock company is not going to be valued at a billion dollars and have a single employee. If you notice numbers that look "off" or a product that doesn't sound right, don't invest.

A lot of the penny stock companies on the OTC are shell companies, and that means that you could get easily fleeced if you're not careful.

Do not try to short penny stocks.

Almost all the best stock market trades ever made were moments where the trader had managed to short the market. The thing is, 99.9999 percent of the time, traders will not be able to short the market or "time" the market.

The truth is that trying to short penny stocks is something that should be left to professionals—and even then, it's really doubtful they will be able to do what they set out to attempt. Don't try it; don't get greedy. It will not work.

This is one of the least glamorous tips for trading penny stocks, but it's really worthwhile. Avoid making this greedy mistake, and you will have a lot better chances at trading profitably.

Use stop losses in your trading.

Penny stocks are way more volatile and prone to crashes than any other type of stock out there. Using stop loss orders means that you will automatically sell off your stocks the minute they reach below a certain thresh hold.

As you can imagine, if you're trying out the science of investing in penny stocks for the first time, this is huge. It's one of the few tips for trading penny stocks that could save you money in a big, big way.

Tune out all the success stories.

Counterintuitive as it may be, you do not want to hear all the success stories from people who witness penny stock share prices going through the roof. This will make you overly hyped about trading and tends to make new traders feel very frustrated when they notice that their shares aren't faring well.

A better way to handle the psychological side of trading is to make penny stocks a smaller portion of your portfolio. If they explode in a good way, you'll profit. If they don't, you'll be thankful that you followed these tips for investing in penny stocks because you'll have other investments to cushion the blow.

Trade on high volume.

Tips for trading on penny stocks will often tell you to watch where you put your money, but let's get a little more specific on it. It's often best to trade on high volume penny stocks. Low volume penny stocks are hard to sell, simply because no one is buying them.

By sticking to trading stocks that have volumes of at least 100,000 shares per day, you're preventing yourself from being stuck. On a similar note, most experts suggest trading stocks that are at least at 50 cents per share pricing.

This tends to show some seriousness and staying power that other penny stocks won't have.

Don't trust the management of penny stock companies to tell you the truth.

Managers of a penny stock company have to do what they can to ensure that their company's stock goes up. They have a vested interest in it and many will do whatever they can to make sure that the company gets more investors.

A lot of the tips for trading penny stocks emphasize the fact that penny stock companies aren't held by the same standards as blue chips or other similar types of investments. There's a reason they keep emphasizing that.

You really have to be careful with penny stocks, and you can't take managers at their word. Some of them are totally comfortable lying straight to your face about the company's welfare if it means you will give them thousands of dollars to play with.

Finally, don't invest money you can't afford to lose in penny stocks.

This is one of the most obvious tips for trading penny stocks and is regularly cited as one of the better tips for stock trading in general. With penny stocks, you never know what will happen—even if you do all the due diligence in the world.

If you want to play it safe (and trust me, you do), you will avoid investing all the money you have into penny stocks. Diversify, and watch it all grow for a safer bet.