You’ve probably heard penny stocks are all shady and scams. But what if I told you that not all penny stocks are scams. When you’re trading penny stocks, you need to focus on reputable companies. For example, Apple Inc. (AAPL) had a split-adjusted price under $5 at one point. You see, the U.S. Securities and Exchange Commission (SEC) considers stocks trading below $5 to be penny stocks. That said, don’t get discouraged trading penny stocks because of what you heard. Just stick to reputable penny stocks and you could potentially make money.
Penny Stocks 101 – Finding Reputable Companies
According to the SEC, “The term ‘penny stock’ generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges.”
One of the important factors to keep in mind for penny stocks 101 is whether a stock is listed on NYSE, Nasdaq or OTC Markets. If a penny stock is listed on NYSE or Nasdaq, it’ll be really easy to conduct your own due diligence. On the other hand, if a penny stock is listed on OTC Markets, it might be difficult to find information.
For the most part, you would want to stick to companies listed on Nasdaq or the New York Stock Exchange (NYSE). However, that doesn’t necessarily mean companies listed on OTC Markets are bad stocks. For example, Nintendo (NTDOY) is listed on OTC Markets, and it’s a widely known company. Moreover, some companies may not be eligible to list their stock on Nasdaq or NYSE, but are listed on major international exchanges.
With the whole pot stock phase, there are plenty of penny stocks in the space listed OTC. However, that doesn’t mean they’re not good companies. Now, rather than boring you with details about how to find reputable companies, let’s take a look at how you could find the needle in the haystack and potentially bank on penny stocks.
Penny Stocks 101 – Starting with Chart Patterns
Before we even get into the details of how to find reputable penny stocks to trade, let’s take a look at one of the watchlists that was sent out to the trading community.
GEVO – Continuation chart pattern with rising volume recently and big range to the MA(200) above the recent high of $4.77 where it stopped on Monday. With any luck good news drops and this pops for a big profit.
RENN – Earnings winner that closed above the MA(50), suggesting a move to the middle $2’s is possible. Heavily short from the $2’s down to the MA(200) over the last month should keep pressure on the offer and lift this another $.30 before resistance.
MHLD – Usually I wait for oversold chart patterns to show signs of bottoming. But after a week of decline I decided to roll the dice and look for the whipsaw. Often stocks move in 3,5 and 7 day trends so this should be close to the near-term bottom and bounce soon. But for the record, looking for candle over candle is usually how I apply the oversold pattern.
For the most part, the research starts with technicals. If I see a high-probability pattern, I’ll conduct more research into the company. Thereafter, I’ll have a penny stocks watchlist, and I’ll be looking to trade those penny stocks if they get to my price. In addition to technicals, I’ll look at catalysts or fundamental shifts in the business or industry.
That said, let’s take a look at a trade example.
Penny Stocks 101 – Finding Reputable Companies Trade Example
I had New Age Beverages Corp (NBEV) on my watchlist, and I actually traded this penny stock.
Here’s a look at the snippet of the watchlist that went out to the community.
NBEV – News winner that’s latching onto the pot stock craze but from a beverage angle. I like this to the $3’s as a breakout above the middle $2’s. I’ll only be looking for entry into a dip, maybe using Monday’s opening range just above $2 for now as my pivot. Thinking 10,000 shares, maybe more as it’s very liquid with a goal of $.50 / share on the way to $3 into the breakout or $5,000+ in realized profit in 1-4 days.
We already saw Constellation Brands (STZ) invest a sizable amount in Canopy Growth Corporation (CGC). This caused cannabis stocks to explode. Now, there were rumors surrounding Coca-Cola and NBEV. this was the catalyst I was looking for to get into the stock.
Keep in mind, NBEV is listed on Nasdaq and is considered one of the many cannabis penny stocks out there. I was able to conduct due diligence and this company was relatively reputable, and corporate filings were easy to find. That said, I went ahead and pulled the trigger.
Here’s a look at the email I sent out to the penny stocks trading community.
I actually bought more once the stock pulled back.
The stock didn’t do exactly what I thought it would do, it still turned out to be a decent trade.
That’s not bad in just a few hours.
Now, if you want to improve your risk-reward ratio, check out the Penny Stock Playbook. This playbook could teach you how to locate inexpensive stocks with massive upside potential.
The Bottom Line
If you’re looking to trade penny stocks, you need to find reputable companies. Generally, you’ll want to stick to Nasdaq and NYSE penny stocks initially. If you get good at that, you could potentially move on to OTC penny stocks. However, you’ll need to keep in mind the fact that OTC penny stocks may not have readily-available information. OTC Markets is like the wild wild west, and if you’re a beginner you should avoid this until you gain experience.