Do You Trade Penny Stocks? This Is A Great Year To Learn
Understanding how to buy penny stocks is a huge benefit when approaching the stock market. If you can feel comfortable trading these volatile and cheap stocks, you can consider yourself among a tried and true group. This year learning how to trade penny stocks has reached a feverish pitch. First thing’s first, however, you need to know exactly what you’re buying.
What are penny stocks. Man will have their own definition of penny stocks. But according to the Securities and Exchange Commission, the standard definition is any stock trading below $5 per share. But should you be trading penny stocks right now?
It's a great question and is only one that you can answer. However, if you're looking to venture out into this world of volatility, make sure you've got your wits about you. What I mean to say is don't just dive head-first into things hoping to hit the lotto...because this isn't a lotto and you can actually make money consistently with the right strategy.
Where Can I Open A Penny Stock Trading Account?
If you’re looking to trade, you’ll need to open an account. Make sure it’s with a broker that offers the ability to buy penny stocks. We’ve found that it’s much easier to open an account with an online broker than traditional brokerage houses. This is for 2 reasons.
First, many of these traditional brokers don’t accept requests for day trading penny stocks. Second, the time it takes to pick up the phone, reach a live broker, place the order and then have it executed is far longer than it would take to execute a trade with an online broker.
Here are several top penny stock brokers (in no particular order) that allow you to trade stocks under $5:
Of course, there may be other brokers for trading penny stocks, the ones above have been actively used by day traders recently.
What Is A Day Trading Account & Is It Important?
If you’re just getting started, you’ll want to know your options for opening a trading account. Many new traders will start with a margin account, sometimes by default. This entails depositing cash and then gaining access to margin or “leverage” on the money you’ve deposited. It also offers immediate settlement of cash with most brokers. What that means is if you buy and sell the same stock on the same day, proceeds from that trade is immediately accessible in your account. But there is a downside.
Pattern Day Trader Rule a.k.a PDT Rule
What is the PDT rule? If your margin account does not have a value of at least $25,000, then you are bound by the “Pattern Day Trader” or “PDT Rule”. This rule restricts you from placing more than 3 day trades within a rolling 5-day period. If you violate the PDT rule, a broker can restrict your account from placing any day trades or even restrict it to closing transactions only for a certain period of time.
But there are ways some traders can seemingly make “endless” day trades without violating the PDT rule. Those with less than $25,000 without margin enabled – also known as a cash account – aren’t bound by the PDT rule. The caveat is that they can only trade with the amount of settled cash in their account and there’s no leverage or margin. In light of this, you should know when funds from certain types of trades settle.
For example, many brokers have a “T+3,” “T+2,” or “T+1” on certain trades. TD Ameritrade, for instance, has T+2 on stock trades and T+1 on options. This means T or “trade day” plus 1 or 2 days for your cash to settle. Regardless, ask your broker for available options on account type during the sign-up process.
Can You Make Money With Penny Stocks?
This is the ultimate question and one that only you can answer. If you understand risk then you're off to a good start. Knowing that it's ok to sell when a stock isn't at the top or ok to buy even when penny stocks aren't at the absolute bottom is something that seems easy to grasp but harder to deploy when it comes time.
Think about becoming a robotic trader and remove emotions from the equation. It also doesn't hurt to know how to read charts and understand technical analysis either. Also, when it comes to day trading penny stocks especially during times like these, knowing how to use social sentiment to your advantage is important too. The hoards or retail traders hype up certain stocks but if you're on the wrong side of the "hype train" it could be a painful trade to make.
So don't just find penny stocks that are moving. Understand why they're trending. What's driving momentum. If it's just hype alone, then the longevity of the move may be fleeting depending on the strength of the bullish sentiment. For instance, both AMC and GameStop stock soared earlier this year. While they've resurged in the last month, both still trade far off of their 2021 highs. Clearly, AMC was more recent to reach those record levels. However, the same statement holds true. You're in this to make money. Those who have been diamond-handed clearly have nerves of steel. But other traders will take up a hybrid approach to "the long game" with penny stocks.
Hold A Core, Trade A Core
This strategy is relatively self-explanatory. The idea is taking a position at an optimal price then buying and selling as the stock/option moves in the direction you want it to. The "core" position is ideally one with an average price lower than whatever the retail price is. In this case, the trader can take advantage of longer-term moves while also benefiting from day trading action with short-term pops in stock price.
