Let’s be honest, “95% of penny stocks are awful companies or poor investment choices,” says Peter Leeds one of the leading experts in the industry, who’s been making significant money off penny stocks for over 15 years. However, there are still multiple penny stock success stories and when executed correctly, you can yield returns on investment that are exponentially higher than any stock traded on the major exchanges.
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So if you’re looking at how to make money off penny stocks but don't know where to start, here are five tips from the pros on how to make money with penny stocks that you can use today.
1. Practice Makes Perfect
Leeds knows that 95% of penny stocks are poor investment choices because when he first started trading he lost $3600 in two weeks. This forced him to start paper trading, also known as simulated trading, a way in which would-be investors can practice investing without committing real money. With hundreds of paper trading platforms out there such as, www.investopedia.com, www.simvest.com or www.marketwatch.com, it’s not hard to find a platform that’s right for you.
Know When to Buy or Sell a Stock – Peter Leeds
Of course, when you start off with $100,000 (as most paper trading platforms do) and aren’t risking real money, your reactions and emotions won’t be the same as when you start trading for real. Nevertheless, using a virtual platform will help you learn how to make money with penny stocks, as well as, more about what kind of investor you are. Since you will have a much larger imaginary stock portfolio you will be willing, and needing to make way more imaginary trades. The more trades you’re making, the more mistakes you’re likely to make too. But in this case that’s a good thing; learning from your mistakes without getting burnt by them is one of the best benefits to paper trading.
Once you make the jump from practicing trades to making real trades you’re less likely to make the same mistakes again and more likely to be making money on penny stocks.
2. Devise an Investment Strategy
When it comes to penny stocks, Timothy Sykes, famous for turning $12,000 into over $4 million said,
“You can’t invest in penny stocks as if they were lotto tickets, but unfortunately that’s what most people do, and they lose again and again.”
This highlights the importance of having a well-practiced investment strategy. Having an investment strategy is especially important when it comes to knowing how to make money in penny stocks because all penny stocks are risky by nature. Lower-priced shares are typically more volatile, so you will want to make sure you know what you're doing before you start really shelling out your hard earned money. If you can develop a winning strategy with low-priced shares, you are more likely to realize quicker gains.
Following step number one and practicing, is, of course one of the best ways to develop an investment strategy and learn how to make money off of penny stocks; yet another way to ensure this investment strategy continues to work, is by keeping a journal detailing your every move. Whether it’s good old fashion pen and paper, or online programs such as Excel or Profit.ly, being able to look over your investment history is key. You’ll be able to see what did well, when things went wrong, and what size positions you took. By taking notes on each move you’re allowing yourself to easily remember mistakes and understand why you made certain moves that worked. This journal combined with continuous practice is an invaluable resource to building a strong investment strategy.
3. Stay Away From Pink Sheets
The pink sheets are an over-the-counter (OTC) market connecting brokers with dealers electronically. On account of the fact that there is no central trading floor or stock exchange, pink sheet-listed companies do not have to meet the same criteria as major stocks.
All a company needs to do to get listed on the pink sheets is submit a form with the OTC Compliance Unit. The form must have current financial information, and the more willing a company is to show its books, the easier it is for a broker-dealer to quote a price for that company. But, some companies will make it easy and others will not as they are under no obligation to do so.
In addition, many pink sheet-listed companies do not even file periodic or even annual reports with the Securities & Exchange Commission (SEC). This can make it almost impossible for an average investor to get any real information regarding these companies.
As we can see transparency is not comparable to the financials for exchange-listed companies and thus much riskier. Likewise, investors have to be aware that these companies are hardly covered by analysts, financial papers or financial shows. This requires a lot more research on the part of the investor to locate information. This extra step may or may not even be worthwhile in the end.
Lastly, pink sheet-listed companies are usually very small, tightly held and may also be thinly traded. This is a disadvantage because when a stock is thinly traded, the chances of selling without driving the price down are slim. No matter what the market, if you can't find a buyer, you won't make any gains; this is even more of a reality when it comes to pink sheet-listed companies.
So how do you buy penny stocks if you should stay away from the OTC market?
Well, penny stocks are defined as any stock under $5 therefore it’s possible to find high quality penny stocks trading on the NYSE, the AMEX or the Over the Counter Bulletin Board. The OTCBB is a quotation service that also lists over-the-counter securities owned and operated by NASDAQ.
4. Use Multiple Sources
Since knowing how to make money on penny stocks is about finding those 5% of penny stocks that are in cash-rich companies with low debt loads, rock solid fundamentals, and a clear growth plan, it’s important to have a reliable way of compiling a good penny stock list.
To find successful penny stocks, garner information from a wide variety of sources. For example, Connor Bruggemann, a 16 year old boy who turned $10,000 into more than $300,000 by day trading penny stocks, from his mobile phone, monitors trades using a service called Level2, which shows him who the buyer and sellers are, what prices they’re asking for, and how many shares they hold.
In addition, Bruggemann checks the chat room, which he runs and various message boards he either controls or frequents.
Another important source is major media; however, this source is only useful to get a pulse on the market, but never take mass media at face value. Keep in mind CNN, for instance, makes money by scaring you, networks like these are just telling you what has already happened, and what the masses are doing now.
As Leeds states, “if [networks] are telling you that terrorists are going to take down every plane in the sky, you know air travel is safer than ever. If they are talking about an Ebola pandemic, it means the outbreak is finally getting under control.”
The major media will help you, but don't expect what they tell you is accurate or will come true. The best way to utilize major media as an information source is to consider it as a contrarian indicator (we will see a prime example of this below).
Moreover, making money requires spending money. If you want reliable sources it is usually best to stay away from free newsletters or free penny stock websites. People aren’t giving out hot tips just to be nice. When it comes to the free newsletters and websites they are promoted by people who get paid by the companies they tout. These help to artificially pump up stocks through exaggerated claims. Following these type of sources increases your chances of losing money in a pump and dump scheme.
5. Timing is Everything
A penny stock can see an increase of more than 300% in a week.
But what comes up must go down, and penny stocks can incur losses of that magnitude just as quickly too. Tim Grittani, one of Timothy Syke’s most successful students, walked away with $8,000 in ten minutes by betting against a company whose stock tumbled almost 60% in the span of 23 minutes.
In this case Grittani had taken advantage of a pump and dump scam, noticing that shares of the company called Nutranomics, trading over the counter, had tripled in just a month. He felt this increase was due to the manipulation of scammers who will hype up a stock through newsletters, emails and other promotions to increase the value of the stock, and then sell them all off for their own benefit, thus crashing the stock.
Shorting penny stocks is incredibly risky and best left to seasoned professionals, but this underscores just how important timing is when it comes to knowing how to make money from penny stocks. Many penny stock success stories occur when investors get in and get out. However, if you are a new or cautious investor and want to know how to make money off penny stocks, Peter Leeds has an excellent strategy on timing that won’t keep you glued to a computer all day.
Focus on what will happen in a few months rather than a few days or a few years, and you will have a very high success rate. The most effective method of investing is knowing which way the price-drivers and events are headed, but also knowing when they will play out.
Leeds doesn’t say what will happen a few hours or days from now but rather he is looking a few months out, with an extremely high level of certainty. For example, we know that gold and precious metal prices are going to increase. How so? Well the media is trumpeting the new highs on the recent momentum in the stock market; because of this is it wouldn’t be surprising to see further growth in the short-term.
But it’s important to think about what the markets should be doing, and position yourself accordingly. Therefore, the general momentum and widespread media coverage might push the S&P higher in the short term, but in the medium and longer term there absolutely should be a significant stock market correction. According to Leeds, “When and if this manifests, the Fear Index (VIX) will spike, which will bring the VXX to higher levels, and will drive gold and precious metals prices even higher than what we've already seen in recent months.” As always, keep in mind that this type of timing is where the biggest opportunities come from.
Ultimately, if you want to learn how best to make money from penny stocks listen to the pros! Do not to attempt to day trade if you're a newbie. While you're learning your way around, rely on experts for analysis on trends and maybe sign up for some stock tips. For beginners and for those who have day jobs, there are several services wherein you can get 3 to 5 swing trade alerts every week to help you make steady profits. Just make sure to read to the reviews first!
Penny stocks are attractive because of the potential for incredibly high gains, however the higher the reward the higher risk. Don’t rush into things and practice with paper trading first. Don’t treat penny stocks like lottery tickets and have investment strategy just like the pros. Take time to work on your investment strategy by keeping track of your every move and learning from your investment history. Always make sure to do thorough research from as many sources as possible, be cynical and don’t buy into hype.
Finally, it’s all about timing so don’t forget to make that a major part of your investment strategy. Sometimes it’s best to get in and get out, grabbing any gains you’ve made even if it’s just 20 or 30%; other times it’s wiser to position yourself for the longer term, focusing on what will happen in a few months.
Overall, you can make money with penny stocks, as the above success stories highlight, just make sure you stay informed and are in it for the right reasons. Penny stocks are not a get rich quick scheme but that doesn’t mean you can’t get rich.