The reality is not everyone has the luxury of trading stocks. Those who want to learn how to trade penny stocks often think they need a lot of capital to generate high returns. However, that’s not the case. Not everyone starts with a large trading account, or an account with over $25K. Trading with a large account is a lot different than small trading. When you’re first starting out to trade, chances are you’ll be starting with a small account. You shouldn’t be afraid to trade penny stocks because you have a small account. You need to continue to learn how to trade penny stocks and approach it with grit. That said, let’s take a look at how to trade penny stocks with a small account.
How to Trade Penny Stocks With a Small Account
There are a few tips and tricks to trade penny stocks with a small account. The first thing you need to understand when learning how to trade stocks with a small account is proper risk management. Before you even get started scanning and filtering for penny stocks to trade, you need to understand how and when to take profits, as well as cut your losses.
No trader likes to lose money. If they do, they would be considered “degenerate gamblers.” When you’re first starting out, you need to learn how to properly assess stock risks. Will you have more conviction in certain setups or will you use an equal dollar risk strategy? You need to decide this for yourself. In other words, if you want to employ an equal dollar risk strategy, you would risk a certain amount per trade. That means you don’t like one setup better than another. For example, you might consider risking $50 per trade. If you’re down $50 in a stock, you would cut it automatically.
On the other hand, some traders will like certain setups and be more aggressive, risking more on those trades. Again, when you’re learning how to trade penny stocks, this is all up to you and your personality. One tip: When you’re first starting out, risk a small amount per trade because you may not know what your best trading setups are just yet.
What Is Selling Short?
Selling short is borrowing a stock from a lender, selling it, then buying it back to return to the lender. The borrower hopes that the stock goes down in price before they buy it again. You’ve probably heard of penny stocks that go up 100% overnight. It might be attractive to short sell the stock, but you shouldn’t do this with a small account. Penny stocks could run up multiple days, and it’s extremely difficult to spot the top. You could easily lose over 25% if you short sell a penny stock. Moreover, your broker might not have shares available to short. Who needs that headache?
Take Profits and Cutting Your Losses
You also need to learn to take profits when you’re learning how to trade penny stocks. A lot of beginner traders fall in love with penny stocks and hold on too long, expecting a larger move. When you’re in the money, take the profit because you never know when the penny stock could go against you.
For example, here’s a look at one of my trades and my process.
It’s good to keep your expectations in check when you’re learning how to trade penny stocks. You shouldn’t expect all the stocks you get into to be massive winners.
Avoid OTC Penny Stocks
Penny stocks that trade over the counter do not face stringent requirements like those listed on the New York Stock Exchange (NYSE) or Nasdaq. Penny stock companies listed on NYSE or Nasdaq need to be fully transparent and the stock price must stay above $1 per share. Those that do not meet the requirement risk being delisted, which would cause the stock to trade OTC. In turn, the stock price should fall. Additionally, OTC stocks tend to lack liquidity, which makes it difficult to buy and sell. That said, you should focus on those only traded on NYSE or Nasdaq. If you see a penny stock is traded on the OTC markets, just move on.
The Bottom Line
When you’re learning how to trade penny stocks, you should keep some of these tips in mind. The first thing you need to do is figure out how to manage your stock risks. You should never let one position potentially ruin your account. In other words, don’t put all your eggs into one basket. Next, you’ll need to learn how to take profits when you see them. The last thing you want to do is see profits in a penny stock, not sell it, and watch it go against you. Moreover, you want to avoid short selling penny stocks and buying OTC penny stocks. Shorting penny stocks and buying OTC penny stocks are extremely risky and could be detrimental to a small account.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.