Depending on your style of trading, a stock’s market capitalization matters. Stocks are categorized as: micro-cap, small-cap, mid-cap, large-cap or mega-cap. If you’re learning how to trade penny stocks, you need to understand that the market capitalization of a company matters. That said, let’s take a look at how to trade penny stocks by examining a stock’s market capitalization.
How to Trade Penny Stocks – Market Cap Matters
If you don’t know already, it takes a lot to move a mega cap. Mega cap stocks are companies with a market capitalization of over $300B. In this stage, it’s hard for retail traders to have an edge. Mega cap stocks are well known and include the likes of Apple Inc. (AAPL), Microsoft (MSFT) and Amazon.com Inc (AMZN).
A stock’s market capitalization is calculated by multiplying its current stock price and its shares outstanding. This simple calculation lets traders and investors know a company’s size and how market participants are valuing the stock.
For the most part, I focus on penny stocks. Just because a stock is trading under $5 per share, as defined by the SEC, it does not necessarily mean the company is small. Plus, at one point or another, some of the most well-known stocks today were penny stocks.
For example, Apple Inc. (AAPL) was a penny stock in the early 2000s.
Here’s a look at AAPL today.
Just because a stock is categorized as penny stocks, it doesn’t mean its bad. That in mind, that’s why we have the market capitalization calculation. This lets us know exactly how much the market values the company.
How to Trade Penny Stocks – Filtering by Market Cap
Generally, I like to focus on stocks with a market capitalization of over $300M. Now, it’s easy to filter for market capitalization. This narrows down your universe quite a bit.
For example, let’s say I’m willing to trade small-cap stocks, as well as mid-caps and large-caps. Small cap stocks are those with market capitalizations between $300M and $2B. Mid-caps are stocks with market capitalizations between $2B and $10B. Finally, large cap stocks are those with market capitalizations greater than $10B.
Here’s a filter for stocks with market capitalizations between $300M and $25B.
There are literally thousands of stocks to comb through to find the needle in the haystack. That makes things a lot more difficult. Now, let’s narrow that search down to those with market caps between $500M and $15B.
Still a lot of stocks to look at.
Well, you could also filter by price.
There are a lot less stocks to look through here. This is how I begin my approach when looking for penny stocks to trade. Additionally, I’ll follow up on news and potential catalysts, as well as chart patterns. Moreover, I’ll use the Fibonacci retracements after I’ve found penny stocks that look interesting to me.
For example, I used this filter to find a winning trade. I pretty much used the same strategy I always use and sat on some nice profits.
I filtered for stocks under $15 with market capitalizations between $500B and $3B.
There were hundreds of charts to look through. However, if you want to make money in the markets, you have to put in the work.
How to Trade Penny Stocks – Examples
After filtering by market capitalization, I found two stocks that were interesting to me using my market-tested approach. WEED, Inc. (BUDZ) and General Cannabis Corp. (CANN). After Constellation Brands (STZ) announced it was investing $4B into Canopy Growth (CGC). This sent the stock flying.
Well, with such good news for the cannabis industry, I figured there were going to be other pot stocks that could catch a pop. I found two stocks in the industry. One had a market capitalization of $300M, but that led me to find another industry peer with a market cap of $100M. Keep in mind, the smaller the market capitalization, the more risky the penny stock.
I saw WEED, Inc. (BUDZ) have a nice run up, nearly doubling in just a few days. Now, I waited for a Fibonacci retracement level and other indicators to let me know when it was time to buy.
BUDZ caught a bid when I was looking to buy it.
Now, the stock popped another 10%. Rather than being stubborn and trying to make another $200 on BUDZ, I ended up selling it for an $1,800 profit.
I also bought General Cannabis Corp. (CANN).
I was looking for a continuation in the chart pattern. With a sector catalyst and serious upside potential to the 200-day simple moving average (SMA), and potentially $4.40.
I ended up selling for a small loss. However, I still had 3 out of 4 winning trades.
Basically, market capitalization matters. Even though BUDZ and CANN were considered penny stocks, one was much larger than the other. BUDZ was considered a small-cap stock when I bought shares. However, CANN was still a micro-cap. BUDZ was nearly 4 times bigger than CANN, in terms of market capitalization. As you can see, it’s a little risky to trade stocks with very small market capitalizations.
When you’re learning how to trade penny stocks, you should focus on the ones with larger market caps. Basically, you want to focus on penny stocks with market capitalizations greater than $300M. Now, there’s one thing you need to remember: companies with smaller market capitalizations tend to be more risky than those with market caps in the billions.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.