How To Make Money From Penny Stocks

Trading penny stocks have taken off in recent years, due to the low entry point and the possibility to turn small sums of money into large gains. Experienced investors that have learned to make money with penny stocks have a high probability of making quick profits, but the majority of penny stock investors will lose money. 

How To Make Money From Penny Stocks
The one constant question we hear at the Richmond Club is How to make money from penny stocks? Courtesy of Pixabay

Can You Make Money With Penny Stocks?

The obvious answer is yes, but it’s critical to remember that trading penny stocks isn’t anything like trading your every day large-cap stock. If you want to make good money with penny stocks, you’ll want to understand every in and out before you take the plunge. 

How To Make Money From Penny Stocks

What Are Penny Stocks

Low-priced, micro-cap stocks are commonly known as penny stocks. Even though they are called penny stocks, rarely are they sold for a penny.

The SEC generally considers a penny stock to be stocks that are under $5. And while there are stocks trading under $5 on big exchanges like NYSE & NASDAQ, many investors don’t think of these as penny stocks. 

Most investors look at penny stocks like the Wild West as a place to make money, an area of investing removed from all the glamour and media that comes with larger stocks traded on larger exchanges.

Even though the gains and losses can be impressive in the penny stock world, they’re not often seen elsewhere. 

Now, just because you will never hear about penny stocks on CNBC, this doesn’t mean that penny stocks are not without drama.

Unfortunately, the penny stock world has garnered the reputation as an area filled with corruption and scams. Without a doubt, penny stocks could be the wildest ride yet as an investor. 

So then, if penny stocks usually aren’t traded on normal exchanges, where can you buy them? 

Check out Affinity Metals and their strong performance during 2020, one of the Richmond Club Advisor Penny Stock Picks for 2020.

TSXV:AFF

Courtesy of The Richmond Club

How To Find Winning Penny Stocks

One of the challenges in finding out how to make money trading penny stocks is finding the winning penny stock.

Finding an undervalued stock can be incredibly difficult when first starting out, due to the fact that most large-cap investors have the next big growth stock in their sights.

In penny stocks, you’ll need to find the undervalued stock that has a positive valuation, strong financials, and a promising future outlook. 

To make money with penny stocks, you will first need to find someone that will sell it to you at a low bargain price.

If the company is expected to turnaround, a trader will hold onto shares to realize the gains, which is why it makes these shares more difficult for you to buy. 

After you have bought the “potentially” lucrative stock, you will need to ensure that you can turn around and sell it.

You can always hold the stock and take a chance on it one day selling for a profit, but remember there is a reason you got the penny stock for a bargain, it’s not hot right now. Nobody wants to buy it. 

After taking all this into consideration, the best chance of making money with penny stocks is finding the hidden gem(s), buying it at a low price, and holding on to it until the company is able to rebuild and get back on a major market exchange once again. 

What Are Key Signals of Good Penny Stocks?

In investing we tend to call ourselves glorified history teachers because we are constantly looking into the past.

We are doing that to try and estimate where stocks will move in the future. 

It’s not perfect, but history usually repeats itself. 

So we all need to learn how to read chart patterns and more importantly, how to learn to understand what the charts are saying to make money with penny stocks.

This comes with time and practice just like everything else in life, which is why it’s so important to study stock charts. 

To back up what we see on the charts, it’s very important to review key indicators to determine if a stock will perform well in the future. 

How To Make Money From Penny Stocks

What Make Penny Stocks So Risky?

Penny stocks do provide a few businesses with ways to get access to funding from the public. Some of these companies use this platform as a starting point in an effort to move into the larger markets.

Also, since the stocks sell at such low prices, there is a lot of room for upside. However, some factors will raise the risk associated with trading penny stocks. The securities are almost always riskier than the larger established blue-chip companies. 

A blue-chip stock is a highly recognized, well-established, and financially stable company. Blue-chip stocks will generally sell quality, widely accepted products, and services.

Blue-chip companies generally have a track record of weathering downturns and operating a profit in the face of adverse economic/pandemic conditions, this helps contribute to their long record of reliable growth. 

How to Minimize Risk Trading Penny Stocks?

You don’t need to be a thrill seeker to trade penny stocks. In fact, you should be an investor that hates risk to the point that you’re willing to do anything possible to avoid it! 

If you take large risks in the stock market, you will stand a higher risk to lose a lot of money. In a few cases, you could lose more than you invested. 

Not a smart trading strategy if you ask me. If you want to be successful trading penny stocks for the long run, focus on rules, discipline, and reducing your losses. Be sure to practice risk management. 

Richmond Club Index VS The S&P over the last 15 years. Courtesy of The Richmond Club

We would encourage you to please see our Richmond Club Advisor Group that receives investment advice, stock picks, newsletter, and stock offerings throughout the year. 

Please feel free to contact us at dave@richmondclub.com if you have any questions about the membership.

Alternatives To Penny Stocks

Thanks to the growth of fractional shares, you can usually invest in stocks even when their prices are high. For example, if the reason you won’t invest in a company like Amazon.com (NASDAQ: AMZN) is due to the fact that a single share costs approximately $3000 dollars, you can now buy a portion of a single share and still benefit from future growth in the share price. 

Are Penny Stocks Worth It?

There are a lot of good reasons to invest in penny stocks. Investors who are able to find high growth companies when there share price is still small have a potential for large investment gains than those who wait until those companies have grown into giants in the market. 

However, to be successful in investing in penny stocks in the stock market, you must ensure that you are performing your research and due diligence on the company you are thinking of purchasing.

There are reasons why some of the shares are trading so cheap, many penny stocks are traded so cheaply because the company behind them are not worth much more than the share price. 

In closing, can you make money investing in penny stocks? Yes, you can, but please ensure that you have performed the necessary research to make your penny stock purchase a profitable one.

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