We’ve all read the articles or seen the videos about making money with penny stocks, but how effective of a process is it? Can you actually make it big with penny stock trading, or is it a pipe dream?
It’s not a straight answer, because many people think it’s a get-rich-quick kind of mentality or process. It’s not.
Let’s talk about what you need to do to get good at penny stock trading, find your niche, and see if it plays out as a career path for you.
Can You Get Rich With Penny Stock Trading?
Short answer? Yes, you can. Look at the Grain of Rice story, a mathematical folktale that talks about multiplying results. Penny stock trading is similar if you invest, sell, and reinvest over and over again.
The biggest mistake that individuals make with penny stock trading is cashing out, getting scared or greedy, and then wondering why you can’t.
Penny Stock Trading Relies on Consistency
Penny stocks require you to trade when the going gets good. Unless it’s a company you’ve researched and truly believe in (and some of those will pop up), you should make sure you don’t get greedy, and you sell when it’s going to benefit you the most.
Be consistent. Don’t take a day off in the middle of the week; you have to treat the NYSE hours like you’re punching in and punching out for a job with no sick days.
Deals will appear and vanish fairly quickly in penny stock trading, so be ready to capitalize when you can. Buy consistently, buy in volume, and understand that short-term trades are the name of the game.
Very few are going to be worth the long-haul, and it’s hard to pick those out of a haystack.
OTC vs. NYSE: What You Need to Know
The New York Stock Exchange is the big league, while over-the-counter (OTC) markets are not. These are securities that are traded on broker-to-dealer networks, which means they’re not nearly as accessible.
Here’s a quick sheet of information you need to know about them.
- It’s Harder to Sell: On the NYSE, there’s always a thirsty investor, that’s a given. When you sell your stocks, there’s a chance that someone is going to buy them, but when you sell on an OTC network, that chance is much lower. Partially because fewer people use OTC networks, and that means cashing in when the going gets good can be more difficult.
- Pre-Session Hours: The NYSE opens at 9:30 AM EST, but OTC markets actually open up earlier at 6:00 AM EST. So you’ll have earlier access to the market. It’s a bit early, so the only way this would really work for being 100% active in the market throughout the day is if you also fall in line with the time zone. And there’s one more thing about trading hours.
- Post-Session Hours: From 4:00 PM EST to 5:00 PM EST, there’s an “extra” hour called post-session hours. When the NYSE closes at 4:00 PM, OTC markets are still open for one more hour. These extended hours help traded industries by being more available to investors with alternate schedules (typically it’s people who still work a nine-to-five that invest in OTC penny stocks).
- Some Platforms Are Regulated (Some Are Not): Despite not being the NYSE, some OTC marketplaces are regulated by the SEC, though many or not. This is normally the decision of the OTC market (remember, these are businesses as well), and comes with benefits over non-regulated markets.
Are Penny Stocks Worth the Risk?
It depends on how you position yourself. If you had no savings, and spent the last of your paycheck on penny stocks, then no, it’s absolutely not worth the risk.
You should only ever invest money into penny stocks that you can live without. If the money vanishes, such as if a company completely goes under and that $0.17 stock is no longer an option, you won’t miss the money.
While risk will improve with more money, you can treat penny stock trading as a means to long-term investing, but not it’s own long-term investment.
Penny Stocks Don’t (Often) Have Dividend Yield
Unless it’s listed on the NYSE, and specifically states it, you’re not getting a dividend yield from penny stocks. Many of them are OTC, so they’re only opening up stock options so that their company can stand to gain valuation and grow.
Some penny stocks do have dividend yield stocks. Most commonly, this is a business that has experienced growth, expects to experience more growth after their IPO, and has a plan in place.
If a penny stock offers a dividend yield, it’s something that may be worth holding onto more than other penny stocks.
Penny Stock Trading FAQ's
No, penny stocks are not illegal, but they’re also not regulated by the SEC (at least, most of them). Because many penny stocks—which are SEC classified as being under $5.00 per share—have to use OTC markets in order to sell, they’re legitimate, but riskier than an NYSE stock at the same valuation.
They are not illegal whatsoever. These are legal ways to invest in smaller companies and start-ups. We never know who the next Apple or Google are going to be, so this is your opportunity to get in on an IPO in a legal way without ridiculously large investments.
Pattern day traders are investors that buy and sell stocks within the same day, usually for short-term gains in small numbers. Day trading is an acceptable practice, but in apps like Robinhood, you may get flagged as a pattern day trade and be limited to how many stocks you can buy and sell in a given week.
Penny stock traders often run into this issue, so you can unintentionally ruin day trading for yourself if you do it too often.
If you trade penny stocks, do so with purpose and try not to sell too often (on official marketplaces at least, there are OTC marketplaces that don’t flag you as a pattern day trader, although those often require sale commissions in excess to apps like Robinhood and Webull).
Penny stocks are normally about short-term gains. The best way to look at penny stock earnings is that you’re not investing, so much as you are gambling—every penny you spend, so to speak, could be completely forfeit if companies go under or don’t grow.
To make money with penny stocks, never invest any funds that aren’t 100% expendable. Buy in volume so that when the price moves marginally, you stand to gain far more than the average investor.
A stock moving by $0.08 is marginal for many, but in the correct volume, it could be a small four-figure gain for the savvy investor.
Can You Really Get Rich From Trading Penny Stocks?
Can you make it big with penny stocks? Yes, you can. We’ve all heard success stories in the past, but it does have a much higher risk than other types of trading.
Penny stocks are a way for someone with a low budget to get in on the ground floor, snatch up an IPO, and begin their investment portfolio.
You could make it big, or you could fall flat and have nothing (including dividends), so it’s something that you should only ever consider doing with 100% expendable funds. Penny stock trading is not a career.
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