Online Penny Stock Trading

by Charles

Finally, a site dedicated to providing quality information on penny stock trading rather than trying to sell you scams!

With Online Penny Stock Trading, we take a serious and professional look at the business of trading penny stocks. We do not promote stock picks or sell products related to the penny stock market. We examine and present the cold, hard facts, and provide leads to legitimate established brokers and references. If you are patient and diligent, this site can, in fact, help you understand how to make legitimate money.

Penny stock trading is not a means to “get rich quick”; it involves both serious work and serious risk. Please see the following index for help navigating this page. Each section will be more thoroughly explored with its own guide on this site.

What Is Penny Stock Trading

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Penny stocks are issued over-the-counter (OTC) through institutions such as the OTCBB (over-the-counter bulletin board) and Pink Sheets. These are common stocks which lack market capitalization. Sometimes they’re brand new, but sometimes they’ve been de-listed from the stock exchanges.

Some people think penny stocks are traded thinly, however share volumes often exchange in the several hundred million range daily. Because of these millions of exchanges and low prices, this type of stock is often manipulated by organized promotion (or to put it simply, hype). This can be difficult to combat as often it is difficult to find verifiable information on penny stock companies.

Sometimes it is not the company itself that participates in this promotional manipulation but traders attempting to exploit the market through its volatility.

In the U.S. markets, the specific label “penny stock” refers, in a general sense, to stocks traded beyond the major stock exchanges (NYSE or NASDAQ).

But technically, the SEC (Securities and Exchange Commission) defines a penny stock (or micro cap stock) as a speculative low value certificate for a small company, regardless of its market capitalization and regardless of where it is traded.

How To Trade Penny Stocks

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In this section we will provide a brief summary of the actual penny stock trading process. While it isn’t that difficult from a technical standpoint, you should evaluate a number of variables before you begin throwing your money into the delicate process.

For more details and some specific caution, please visit my full article on this topic: How To Trade Penny Stocks.

Trading penny stocks boils down to the following process:

  1. Research the entire market and practice online paper trading before you even consider proceeding.
  2. Open a stock trading account with an online stock broker. For more information on how to choose a broker read my article: Penny Stock Brokers.
  3. Familiarize yourself with your broker’s specific conditions and terms, particularly their transaction fees.
  4. Connect your bank account with your broker’s account. This can take a few days. I suggest keeping a separate bank account which you strictly use for penny stock trading.

Once you’re technically setup, you’ll need the following data to execute your trades:

  • Find out where the stock is traded. (NYSE? Pink Sheets? OTCBB?)
  • Know the stock’s ticker symbol.
  • Define the volume (the exact amount) of shares you want to buy.
  • In most cases you can save on fees by trading penny stock shares in multiples of one thousand.
  • Define your specific purchasing price.
  • IMPORTANT: Define your expiration date. This is how long you wish to hold your order open, or the last closing date on which you would accept this exact trade stock, price and volume.

In the opposite direction, you’ll use essentially the same penny stock data and same process while executing a penny stock trading limit order.

Again, for more details on this process please read my full article on How To Trade Penny Stocks.

Where To Buy Them

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As you delve into the world of penny stock trading, you will discover organizations and services who offer to both pick your stocks and buy your stocks for you. Steer very clear of these kinds of services. Instead, purchase penny stocks through your established micro cap stock broker.

Again, please see my article on penny stock trading brokers for more detail, but you should generally find yourself trading penny stocks with familiar names, and always trade from your established online trading brokerage account. I also suggest reading an overview on how to consider different brokers in this article: Where to Buy Penny Stocks

Some common, trustworthy names you’ll come across include Vanguard, Charles Schwab, Fidelity, Scottrade, Sharebuilder, TD Ameritrade, Zecco, E*Trade. There are plenty of others of course, but these are the most established and trustworthy of the online penny stock brokers.

Yes, some of these major stock brokerages are more expensive then certain advertised services out there. But remember, we’re talking real money here, and there are plenty of scammers ready and willing to exploit the foolish and naive. So stick with well-known, reliable online stock brokers.

Fraud and Stock Promotion

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In another article, I will go into much greater detail on the various known penny stock fraud schemes. But for now here are the most common penny stock fraud schemes: Pump and Dumpp, Chop Stock, Biased Recommendations (or Sponsored Picks… your friendly neighborhood “penny stock newsletter” probably engages in sponsored picks), and Offshore Brokers.

Before you abide by any advice provided to you, be sure the provider of this advice isn’t associated with any of these known penny stock manipulation schemes. For more on this financially delicate matter read my evolving penny stock fraud article.

Stock Trading Software

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Penny stock trading software provides the essential tools you’ll need to research penny stocks, collect vital data and execute microcap stock trades. In some cases you may find application packages that also help you manage your brokerage accounts.

There are generally two flavors of stock trading software: all-in-one packages try to cover every possible functionality, and specialized packages, which focus on a single component and fulfill that purpose entirely.

Component software is usually more focused and more potent, while complete packages often lack versatility and appeal to the more casual traders.

In many cases these days, you can rely on your established penny stock broker to provide you with the services and software you need. However, if you plan to day trade penny stocks, especially aggressively, you may need to invest in some specialized applications.

Charting software is a common component application utilized by day traders to create a graphical representation of the data to assist them in making the necessary quick decisions involved in this type of trading.

I hope this article has given you a good overview of online penny stock trading. If you’ve really read this far, congratulations. You’re well on your way to learning the art and science of online penny stock trading.

The Thrill Of Identifying Undervalued High Potential Penny Stocks

While penny stocks often lure inexperienced investors with low entry prices and a high potential for dramatic returns, they also come with increased risk due to low liquidity and limited financial reporting. I hope to introduce you to methods for effectively balancing the risks and rewards associated with undervalued and high-potential penny stocks.

Many people finding this guide will be looking for stock picks. If you approach any investing, especially penny stocks, in that manner, you will get burned. The truth is that you will likely get burned at some point, no matter your caution or experience. This certainty is why you shouldn’t invest what you can’t lose. I encourage you to review the Security and Exchange Commission Guidance on penny stocks.

I’m sorry if I’m scaring you away. You have to go into this with a rigorous, skeptical mindset. Yes, you can find gold in these hills, but you must prepare for setbacks and be willing to learn and combine technical and fundamental analysis.

I’ll first discuss the risks and rewards of finding and supporting hidden opportunities. I’ll provide you with some concrete tips and specific resources for identifying undervalued penny stocks with high potential.

The Rewards of Investing in Penny Stocks

High Potential Returns

I’ll put my Captain Obvious hat on and start with what you probably already know: the greatest reward in unearthing an undervalued stock of any kind, especially a micro-cap stock, is the tremendous potential for substantial returns. Because of their low price, even a trivial increase in share value may result in a significant profit for you. A fifty-cent stock rising to a mere one dollar represents a 100% return.

The Thrill of Discovery

In addition, penny stock trading often involves fledgling sectors or innovative industries, offering exposure to new ideas lurking in wait to wow the world. Successful investors in this field of finance often relish being ahead of the mainstream public. They often savor their “Christopher Columbus” moment, where they can claim to have been there first. Spoiler alert: this is your first tip. (Does doing the work required to make such a discovery energize and motivate you?)

Affordability and Accessibility

As long as you work with money you can afford to lose, penny stock trading provides an affordable entry point for novice investors. You can purchase a significant number of shares in various companies, all without depleting your bank account. 

Even exposure to the volatility of this low-cap market can teach you lessons in discipline and poise, as well as the benefits of diversifying your investments.

Portfolio Expansion

Even a cautious retirement investor might be wise to include a small number of penny stock shares in their portfolio. As long as they aren’t the primary focus of your investments and you balance them with more conservative and stable stocks and funds, penny stocks can complement a comprehensive portfolio by including exposure to high-growth opportunities.

The Risks Associated with Penny Stocks

I hope it’s not surprising that penny stocks are notoriously volatile. Their values often fluctuate because of speculation rather than solid fundamentals. Because of their volatility and susceptibility to speculation, several risks should warn the wary.

Penny Stock Scams

Aggressive and unscrupulous scammers often target penny stocks. It is, unfortunately, a thriving cottage industry. 

Savvy market veterans seek to exploit the naive by defrauding them through pump-and-dump schemes. In these schemes, these criminals use their capital and connections to inflate the value of low-cost shares and then sell them off quickly, leaving investors who jumped on the pump slope with dramatic losses. 

A lack of regulation and oversight in the penny stock market makes it more vulnerable to these fraudulent activities. Thus, you must conduct thorough due diligence before separating yourself from your capital. 

The Lack of Reliable Information

The major stock exchanges and the SEC’s regulations of those exchanges compel companies to adhere to strict reporting and transparency regulations. But before stocks can make it to these exchanges, they trade on exchanges with limited disclosure requirements. 

Limited requirements may help them in some ways: less detailed reporting means less bureaucracy for budding companies trying to establish themselves. However, it also makes them more challenging to research and understand, and it can make them more susceptible to misinformation and manipulation by the shady crowd.

Understanding and appreciating these risks and conducting thorough research before investing can mitigate potential losses and navigate the challenges of trading in this volatile market.

Tips for Identifying Undervalued Penny Stocks

Thorough Research and Analysis of Fundamentals

You may have to dig deep to conduct this analysis when trading off the main exchanges, but this is how you find the diamonds in the rough. 

Conduct detailed research on a company’s fundamentals: What is their financial health? Regardless of share value and volatility, what is their revenue record and growth? Do they have a sound business model?

Look for companies with minimal debt, consistent cash flow, and a record of strong or at least consistent revenue growth. Sometimes, you can spot undervalued stocks based on the consistency of their revenue growth rather than their growth size. Look for the tortoise among the hares.

Financial ratios like P/E (Price to Earnings) and P/B (Price to Book) will help you gauge if a company’s shares are undervalued or overvalued compared to their peers.

In addition, take into account basic intelligence gathering. Who are the company’s leaders? Does the company have competent management? Is management even stable? 

Before you get too excited about a company or its stock, learn about its industry. How are similar companies performing? What is the company’s market share? What is their target market share?

In some cases, it can help to look beyond a company’s current status to envision its future possibilities. Have they announced any recent strategic partnerships? Are they on the cusp of a new product release?

Understand Technical Indicators

You must develop technical skills to succeed with penny stocks. Learn to leverage technical analysis tools to isolate and identify optimal entry and exit points and understand market trends.

For those who don’t know, when people refer to technical analysis in the context of trading stocks, they mean using methods to evaluate a stock based on market statistics rather than ascertaining the company’s intrinsic value. Several specific patterns help you anticipate the future trading of a security. 

The following techniques all require access to real-time market data, but these are the technical tools you’ll want to master:

Charts

You start with charts. You want bar charts, line charts, and candlestick charts. These different charts provide different ways to visualize price movements, which in turn helps you identify distinct patterns.

Trend Lines

Only slightly less obvious are trend lines. You draw lines on the charts to indicate the direction of price movement. Is it trending upward, downward, or sideways? How does its movement compare to the movement in its specific industry?

Moving Averages

Now, we’re getting into more interesting analysis tools. A moving average smooths out a security’s price volatility over a defined period. This helps you identify more subtle trends.

Volume

You can gain insight into the validity or weakness of a price trend by analyzing the trade volume of a specific stock, especially compared to other stocks in its industry over the same period.

Indicators and Oscillators

And now we’re getting advanced. Indicators and oscillators are mathematical calculations based on the penny stock’s price or volume. Some standard calculations savvy investors leverage include: Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands. If you really want to succeed in finding an undervalued penny stock with high potential, you can’t be intimidated by these terms. You must learn to leverage these tools.

Patterns

I’ll have to do a separate guide on this matter, but technical analysts develop an understanding of specific patterns they see in the charts. These patterns have names like head and shoulder, triangles, flags, and double tops and bottoms. Analysts use these as indicators of future price movements.

Finonacci Retracements

Fibonacci Retracements are a mathematical tool used to predict support and resistance levels based on the Fibonacci sequence.

A savvy, experienced investor will use various combinations of these tools to anticipate future price movements. 

But remember that technical analysis is only part of the equation. When you combine sound fundamental analysis with comprehensive technical analysis, you will illuminate the path to profits.

Investing in penny stocks is not for the faint-hearted. It demands a delicate balance between the lure of high rewards and the reality of substantial risks. Please do not invest money you cannot afford to lose. I strongly advise you to seek the counsel of a certified financial planner or broker before making any decisions or taking any trading action.

While these investments may provide significant returns, you should approach them with caution, thorough research, and a well-thought-out strategy. Maintain your poise and stick to your plan. As with any investment, knowledge and prudence are the keys to navigating the volatile waters of penny stocks.

Choosing A Stock Trading Strategy

Trading strategy is personal, like a style of dress, a way of talking, or a taste in food. No one can tell you one stock market trading strategy is the absolute best stock trading strategy; you need to find what works best for you. What works for someone else may not work for you.

Read through the following strategy overviews and ask yourself the following questions:

  • Will I be able to follow this strategy even if I don’t like the stock?
  • Will I be able to keep up with the information required to run this strategy?
  • Do I have the time or attention span to focus on this strategy to the level that is required?
  • Can I handle the volatility that is inclusive or inevitable with this strategy?
  • Do I have the money required to invest in this stock trading strategy?

Stock Investment Strategy

One stock trading strategy is also a simple investing strategy. This investing strategy generally involves looking at business financials in combination with general economy indicators to determine which stocks will do well. If you wish to look at this from a trader’s mentality I would focus on the mechanical investing strategies. These involve using back testing to determine which indicators you wish to use and then buy and sell based on the trigger points. The information and the purchases in this case only need to be updated as new information is available, which is generally quarterly or even yearly.

The advantages to this approach include lower volatility, lower monetary investment required because of the high win ratio, and a lower level of attention needed to monitor the investments. The major disadvantage is if you design your strategy poorly your returns could be mediocre with a lot of time wasted.

Stock Trading Strategy

True stock trading strategy is generally broken down by time frame. The more you reduce the time you hold a trade the less risk you are introduced to by the factor of time. Time allows more potential for unexpected results. The advantage to longer trading time spans is less impact from trading commissions and mental stamina. One extreme leads you to instantaneous trading completely executed and determined by a stock trading software on your computer. The other end of the extreme is buy and hold investing as talked about earlier. Where you fit in as a stock trader comes down to your comfort level with the questions above.

Keep in mind that even though online penny stock trading often involves a quick turnover it still involves risk. Because of the nature of these stocks they hold a higher risk even though they aren’t held for very long.

Chart Pattern Strategy

Chart patterns are a pictorial representation of the price change of a stock over time. The purpose is to visually see common stock patterns that may be more difficult to notice with a mathematical equation. Investors tend to follow a predictable pattern in certain situations. For example, the double top is a popular chart pattern. When you see a chart that hits recent high, falls, climbs again to near the same high, but not quite as high, you can expect to see the stock fall. Essentially what happened is investors rode the price to the high and some took their profits. Then when the stock fell some traders jumped in for the ride back up. Then as the price began to climb again more investors decided to jump out. This just screams weakness to the rest of the share holders and more will begin to jump out.

One thing to be mindful of with this approach is that it can be easy to make up patterns, sort of like looking for images in clouds. For more on reading stock charts read my article: How To Read Stock Charts

Swing Trading Strategy

Swing trading is based on the price movements up and down around the general direction of a stock movement. Say a stock is generally climbing. Over the short term a stock may climb a little too fast and have to fall, other times it climbs too slow and then rushes to catch up. Swing traders recognize the short term oversold and overbought stocks using tools like resistance and support points, Bollinger bands, and Fibonacci numbers to make quick profits on the short price corrections.

Finding a stock trading strategy that works for you based on the questions above will help you achieve greater success and it will help you enjoy the process more. Don’t try to force yourself into an approach that just isn’t right for you or it may not turn out the way you wanted.

OTC Market

Understanding the OTC Market is an important part of understanding how to trade penny stocks. Most penny stocks are not traded on a stock exchange like NASDAQ or the NYSE, but rather on the Over-the-Counter market (or OTC securities market).

NASDAQ and Penny Stocks

NASDAQ (National Association of Securities Dealers Automated Quotation) operates a small portion of the OTC Market with the NASDAQ National Market (NNM), but this portion of the OTC Market does not include penny stocks. However, there are securities traded on NASDAQ which fulfill most definitions of being a penny stock. The number of these securities available through NASDAQ varies not just naturally but because the NASDAQ listing standards change fairly often. Depending on the current standards, some penny stocks may or may not qualify.

The good news is that if you find a penny stock on NASDAQ, you know it has met some kind of minimum standards and that it has filed with the SEC (Securities and Exchange Commission). A penny stock found on NASDAQ is also easier to follow as most securities on NASDAQ can be found on public quote lists (like in Newspapers). You’ll find that one major hurdle in trading OTC penny stocks is that you often need to go through penny stock brokers who know the market and can find the real price or value of a set of penny stocks. Unfortunately, some of these market maker brokers may have motives other than simply helping you. Finding a legitimate penny stock on NASDAQ helps you steer clear of this difficulty.

Pink Sheets OTC and Penny Stock Trading

Pink OTC Markets, formerly known as National Quotation Bureau (NQB) and informally referred to as “Pink Sheets”, operates the most active component of the OTC market. If you start serious and extended penny stock trading, you will at some point deal with Pink Sheets.

Pink sheets got their name in a literal fashion; before the electronic version appeared, stock traded through the NQB were literally on long pink paper. This distinguished them from bonds traded through NQB which were on yellow sheets of paper.

It is important for you to understand that the Pink Sheets OTC is not a stock exchange and is not considered one by the SEC. Rather, pink sheets facilitate the trading of securities between market makers and independent brokers. Perhaps most importantly, penny stocks found on Pink Sheets do not fulfill a minimum standard and do not need to be filed with the SEC. When you read that, a big red sign that says “RISK” should be blinking in your head.

The electronic quotation system operated by Pink OTC Markets (which changed names from the National Quotation Bureau to Pink Sheets LLC and then to Pink OTC Markets in the last decade) is called the Pink Quote. The Pink Quote system not only facilitates exchange within the Pink Sheets, but it also assists in executing negotiations with OTC market quotation services such as the OTCBB (see below).

OTCQX

The OTCQX is technically a part of the Pink OTC Markets. It is considered to be a premium market tier. The purpose of the OTCQX is to increase visibility of companies traded as OTC market securities. With OTCQX companies, you still do not have the same full disclosure and assurance of an SEC filing, but unlike most standard Pink sheet stocks, they do need to fulfill a minium standard with the Pink OTC Markets. This includes providing audited financials and a specific disclosures to the Pink OTC Markets, which then are often listed on the Pink Sheets News Service.

Within OTCQX, you wil find both the PrimeQX and the PremierQX. Basically, any penny stock which fulfills the Pink OTC Market requirements for the OTCQX is listed as a PrimeQX. Larger, more established companies fulfilling these standards can list their securities as PremierQX.

Penny stocks not meeting the requirements for the OTCQX are listed as No Information, Limited Information or Current Information stocks. I will soon elaborate on these in an article dedicated to just Pink Sheets.

Over-the-Counter Bulletin Board (OTCBB)

The OTCBB provides real-time quotes and volume information for OTC market stocks which are not on a major exchange (such as NASDAQ or NYSE). You can think of the OTCBB as an in-between operator between the major exchanges and the Pink Sheets.

Unlike the Pink Sheets, to be traded on the OTCBB an OTC market security must come from a fully reporting company which is completely current with all SEC filings. However, these are still often stocks with no corporate governance and which may not fulfill the minimum requirements necessary to be listed on a major exchange. In fact, often times stocks traded on the OTCBB are former NASDAQ, AMEX or NYSE stocks which were delisted for falling below minium market capitalization or share price standards.

OTC Market securities listed on the OTCBB are often listed in the Pink Sheets as well.

If possible, trading penny stocks listed as PremierQX on the Pink Sheets and with current data on the OTCBB will help you steer clear of a good chunk of the manipulation and penny stock fraud that occurs with penny stock trading.

Having said that, you will still find plenty of fraud and manipulation with these securities, so always keep your skepticism high and your caution sharp when trading within the OTC Stock Market.

You Need Information On Penny Stocks To Succeed

In the internet age most people depend on Google as their sole source of information. While search engines are certainly the most convenient source, they are not always the most accurate or most complete source when it comes to obscure information, like the information you’ll need to achieve greater success trading penny stocks online.

You will have to put in a little extra leg work to find any valuable information on penny stocks; especially the ones that choose not to list with the SEC at all. If you don’t do adequate research to find accurate information you may as well be gambling with your investment dollars. I hear Vegas is nice this time of year.

Start with the SEC

The place to get some baseline information is with the Security and Exchange Commission (SEC). If the company is filing with the SEC at least they are attempting to look legit. The information provided to the SEC is submitted electronically through the EDGAR database system. Since there is such a large amount of information provided for thousands of companies every year, the only auditing that really occurs is a simple electronic screening process for obvious discrepancies.

Call Your State Securities Office

Each state has a securities regulator. While the federal security regulators may not have caught wind of any issues with either the company or the people who are the primary investors or management, a specific state may have. When people are caught in scams they will often file a complaint, and often this complain never leaves the state level. You should also contact the state where the company originated so you can see complaints and charges during the company’s start up period.

Go To Your Local Business School Or Public Library

Some databases on companies are simply too expensive for the average investor to purchase and keep maintained. Many large libraries and business schools do maintain this information. Often business schools have their students write dissertations on small companies to evaluate their decisions and track their records. These papers become open to the public at state universities. Finding one of these papers or this database information may clear up any concerns you have about investing in a specific penny stock.

From Trade Communities

While companies may not be interested in the average investors understanding of the company, they may put extra effort into their supply chains or other trade resources. Companies need the support of the industry to survive or thrive. No outsider knows the inner workings of a company as well as its employees or its suppliers. If the company depends on a lot of electronic components find the local technical organization where you may meet some of the suppliers. If the company depends on a lot of union workers you can speak with the trade unions on their dealings with the penny stock company.

Speak With The Company Itself

Remember, these penny stocks are not very large. Any investor who is willing to take the time to consider a serious investment has a good chance of getting a sit down with at least an investor relations person. Often these companies aren’t large enough to have an investors relations department so an upper manager will take time with you. If the company cares enough about investors to talk with you that’s a positive sign right there. Companies that are struggling or engaged in some sort of penny stock fraud want as little face time with others as possible. Often you can get more detailed information from a chat and a tour than all the professional prepared financial reports.

Why Put All The Effort Into This?

The point of investing in penny stocks is to find the big hitter in the sea of average and dangerous investments. Whether you are searching for penny stock fortunes or a way to make a little extra money, by better screening out bad stocks you reduce your risk of being hit unexpectedly and you increase your chances of success in this market.