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Penny Stock Basics

How to Buy Penny Stocks: 7 Things New Traders Must Know

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Written by Timothy Sykes
Updated 8/6/2021 21 min read

I want people to understand penny stocks so that they can benefit from trading and not be one of the many traders who are statistically bound to fail. In this post, I’ll start you out on the right foot by offering you a thorough overview of how to buy penny stocks.

The biggest and most basic concept behind my teachings is penny stocks.

Why? I believe that trading penny stocks is one of the most misunderstood styles of trading, and I want to set the record straight.

Plenty of people have an interest in profiting from trading penny stocks, but very few actually take the time to understand how to effectively trade them. Ironically, it’s this lack of preparation that prevents them from realizing their potential as penny stock traders.

I want to change this. I offer plenty of resources like this free penny stock trading guide and this key penny stock trading book, and I focus on educating traders about penny stocks in my Trading Challenge.

I want people to understand penny stocks so that they can benefit from trading and not be one of the many traders who are statistically bound to fail. In this post, I’ll start you out on the right foot by offering you a thorough overview of buying and selling stocks.

What Are Penny Stocks?

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Penny stocks might be a little bit of a misnomer, because these low-priced stocks don’t actually all trade for pennies. Typically, penny stocks are considered stocks that trade for under $5 per share.

Yeah, that’s a far cry from mega-cap companies like Amazon that trade for thousands of dollars per share.

Companies offering penny stocks are typically small. They might still be in developmental stages, or they might just offer one or two products.

Sometimes, the companies in question do turn into something substantial. True Religion Jeans, for instance, was first offered as a penny stock. However, that’s an anomaly. Most penny stock companies never turn into anything.

Interestingly, the fact that many of these companies will fail can help you profit as a penny stock trader, because it opens up opportunities for short selling for potential profits if/when the company’s stock loses value.

Learn the Basics of How Penny Stocks Work

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I know that you probably want to just jump in and get trading, but if you want to become a penny stock trader, you need to take the time to learn the rules first.

Not only must you learn trading penny stocks, but you need to learn how the market works. You need to learn how to predict patterns, and how to create a trading plan and stick to it.

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It’s been proven that the majority of new traders will fail. This isn’t because penny stocks are too hard to trade or because the system is too risky — it’s because new traders simply don’t take the time to learn the basics first! They don’t understand how or why they are trading certain stocks.

Without knowledge, trading penny stocks amounts to nothing more than random betting. It’s like playing a slot machine in a casino, and the odds aren’t in your favor.

By seeking out a group like my Trading Challenge, you’re enrolling yourself in a program where you can learn how to trade penny stocks in a helpful and targeted environment.

Pros and Cons of Trading Penny Stocks

Listen, penny stock trading is not for everyone.

For me, trading penny stocks has proven profitable. This is how I made my fortune, turning my $12,415 bar mitzvah money into nearly $5,000,000 over the years.** However, trading penny stocks isn’t without its share of difficulties.

For instance, penny stocks can be extremely volatile and fast-moving. For new traders, it can be easy to become very overwhelmed by the rapid pace of penny stocks. Keeping up can prove so challenging that many decide to throw in the towel.

Also, while this volatility can mean that there’s potential to make money rapidly, it also means that it’s possible to lose money rapidly. For many traders, this risk is too frightening.

However, the same risk that scares off many traders can actually be a benefit to traders like you and me — because it leaves more room for us to potentially profit.  

Additionally, there are a variety of setups and techniques that you can use to trade penny stocks. Some of my students like short-selling penny stocks like this pattern, or many prefer dip-buying them like I do with this pattern. You can choose what works best for you!

How to Buy Penny Stocks: 7 Things you Must Know

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Once you’ve decided to get real about penny stocks, it’s time to get in the right mindset. If you want to learn how to invest in penny stocks, you’ll need to consider these things before you make a trade …

Learn to Identify the Best Patterns

One of the things I stress in my Trading Challenge teachings is pattern identification. Learning to identify patterns in penny stocks is one of the keys to finding great stocks to trade.

So, how do you begin to identify patterns? By obsessively reading charts, looking at the trajectory of stocks over time, and studying … and then practicing your ass off! In my teachings, I introduce my students to a lot of common patterns in penny stock trading.

It’s important to know that trading patterns are kind of like snowflakes: no two are exactly the same.

But the more you learn, the more you’ll be able to identify similarities in patterns. Once you begin to notice similarities, you can make more confident trades and your risk will be mitigated because you’re applying some science and research to your investments.

Become a Detective

Bet you didn’t know that you’d have to become a private eye to trade penny stocks. However, being able to do some financial sleuthing is vital if you want to learn how to trade penny stocks.

One of the biggest allures of penny stocks is that there’s an easy entry for traders. Really, all you need is a brokerage account and a laptop, and conceivably you could be trading.

However, this doesn’t mean that you should be trading just like that. Not only do you have to take the time to learn how penny stocks work, but you must do research on potential plays.

Penny stocks aren’t regulated as highly as the stocks on national exchanges. So it’s extremely important to research the companies and stocks you’re considering buying.

Never take press releases or stock tips at their word. You never know who stands to gain from such promotions, and penny stocks are filled with pump-and-dump schemes.

Don’t become a cautionary tale. Always put in the time and effort to get down to the bottom of the real story. It could save you money and heartache.

Paper Trade

Paper trading (also referred to sometimes as virtual trading) can be a fantastic way to get your feet wet when you think you might be ready or know everything around penny stocks.  

Paper trading means that you’ll get to simulate trades in a realistic manner, but without actually putting money in the pot.

This is a great way to test your prowess and to see if your pattern recognition and theories about trades are correct. It’s a low-pressure way to begin testing yourself without putting actual money on the line.

There are plenty of platforms for paper trading online; I use this one since it’s made for penny stock traders. Try it out for a while before you begin to trade using your real account. It can be extremely informative, and it can be a good indicator about whether or not you’re ready to start trading for real.

Start Small and Go Slow

Are you ready to make your first trade? When you’re ready to start trading, do yourself a favor and start slow. Don’t start out with huge positions in your trades. Allow yourself to build confidence over time by making small trades at first.

Rather than focusing on the dollar amounts, focus on small gains and learning from each trade. Consider this investing in your knowledge account.

While this might not be as thrilling as throwing all your money on the table, it’s a far more stable way of approaching trading, and it will likely lead you to a longer and more steady career as a trader.

Let Failure Be Your Teacher

Let’s talk about the F-word in penny stock trading: failure.

You win some and you lose some. This is very true for all traders, but it’s an important lesson for new traders to get ahold of right away.

Losing trades and making mistakes is part of the process and it will continue to happen throughout your career, no matter how great you are at pattern recognition.

As an example, even after years of trading I’m still only profitable about 70 percent of the time. You can access my stats at any time on my public page on Profit.ly. There are just too many factors at play to get it right all the time.

But rather than lament this or thinking that you’re failing as a trader, make a decision to learn from your errors.

This is part of why I suggest starting small. This can minimize your losses, and allow you the freedom to really evaluate what went wrong during a trade. It’s easier to do this when you haven’t lost a lot of money.

By taking the time to evaluate your mistakes when they are still relatively small, you can become a stronger trader. This means that as your trades become bigger and your position increases, you can be less likely to make the same errors.

Set Specific Goals

Setting goals is a vital part of the process of becoming a trader. Goals act as your motivation to learn and keep getting better.

If you haven’t read it, I highly suggest reading my post on Goal-setting Theory, where I detail the importance of setting specific goals and how it can play into improving your trading psychology.

Basically, the more specific your goals are, the more powerful they are in terms of keeping you motivated and performing at your best. Don’t underestimate the power of goals in terms of helping you forge ahead successfully as a trader!  

Find a Mentor

Since penny stocks are a singular type of investment, having a mentor who is further along than you in their career can be immensely helpful.

Because they’re further along the line in their career, they’ve already learned how to buy trade stocks, and a whole lot more. By meeting with and learning from a mentor, you can absorb all sorts of knowledge about what to do — and what not to do — as a trader.

Trading Challenge

I didn’t have a mentor early on in my career, but I wish I had.

Today, I act as teacher and mentor to my Trading Challenge students so that I can provide them with the guidance I never had. I want to teach you all the lessons and tips I’ve learned along the way — many of them hard-earned.

It annoys me how tough it is to get straight answers and a clear education about how to trade penny stocks, so my Trading Challenge is a way to help enable aspiring traders cut through the bullshit.

I don’t need to hoard all this knowledge for myself. There’s enough to go around. I want to help teach you the skills you need to forge a long-term, sustainable career as a trader.

Yes, this includes plenty of video lessons, webinars, blog posts, and other resources. But most importantly, it’s a working education — you can jump into actual trading while you learn.  

Rinse and Repeat

These tips don’t amount to a simple to-do list that you can follow and then consider yourself a great trader. For the best results, you’ll have to revisit several of these steps over and over at various points in your trading career.

For instance, while you may master the basics of penny stocks pretty quickly, it’s important to go back and revisit your studies every now and again to brush back up on the basics.

And continued studying of patterns and research are habits that you should adopt early on and maintain throughout your career as a trader. Routine and trading go hand in hand, so be sure to dedicate yourself to the process wholeheartedly!

Where Can You Buy Penny Stocks?

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You’re probably already familiar with the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX). Well, you won’t find penny stocks on these exchanges.

Let’s get familiar with some of the other exchanges where you can pick up penny stocks:

Pink/Grey Sheets: The pink sheet or grey sheet exchanges are where you’ll find the smallest publicly traded companies out there.

These stocks are very volatile. They’re rarely liquid enough for penny stock trading. Most of the companies on these exchanges will trade for $5 per share or less, but the lack of liquidity makes them less than ideal.

The OTC Bulletin Boards: Also referred to as the OTCBB, this is an electronic exchange that features companies that aren’t listed on the NASDAQ. The stocks here also typically trade for $5 or less per share, but tend to have better liquidity and volatility. This makes them better contenders for penny stock trades.

The NASDAQ Smallcap Market: This is my all-time favorite market. It’s the NASDAQ of penny stocks–literally. The stocks here typically trade between $1 and $10 per share.

The market is extremely liquid and the stocks trade millions of shares — sometimes 10 to 20 million shares traded per day. They’re also volatile, which is a winning combo for pennystocking. In my opinion, this exchange must be on your radar.

Best Online Broker for Penny Stocks

No, you’re not just going to call up a small company and ask how to do it. To buy and sell penny stocks, you need to make the transaction through a broker. Most traders these days opt to use online brokers, and here are some of my thoughts:

E-Trade Penny Stocks

E-Trade is a big and popular online broker. They have a great, user-friendly interface and plenty of features.

They charge commission fees of $6.95 per trade (at the time of this writing), which isn’t insignificant, but in general you get a lot of benefits for what you pay for in terms of quick service and reliability.

Also, you don’t need a minimum amount to set up an account, so it’s ideal if you’re trading with a small account. I almost always have an E-Trade account open for trading smaller amounts of money.

Penny Stock Trading Software

In addition to a broker, you’ll want to have access to penny stock trading software that will help you perform analysis on the stocks you’re considering. Here’s my favorite resource:


StocksToTrade is an incredible platform for penny stock traders that includes a variety of features including scanners, charts, watchlists, level 2, and more. The filters are adaptable, so you can adjust your searches to suit your particular trading strategy.

The platform also features a paper trading module, so that you can test out methods and trading techniques before you risk actual money. This can be a great way to put in your research and test it out.

Recently, StocksToTrade announced a big new development: it’s now set up for broker integration.

That means that you can set up your broker with your StocksToTrade account for seamless integration of research to executing trades. You can make trades using your broker, right from the platform.

Key Tips on Buying Penny Stocks

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Looking for some more insight on how to do this yourself? Chew on these great tips …

Look for Volatile and Low Priced Stocks

Volatility is a misunderstood quality about stocks. It simply refers to how quickly and sharply stock prices are moving. It can be scary, but it’s a good thing when it comes to penny stocks.

It’s these price swings that can help penny stock traders make money. The thing is, when a stock has a swing in one direction, it will eventually reverse, like a pendulum. The key is not getting caught on the wrong side of the momentum. That can get very scary very fast.

Volatility makes stock prices move, so that you can potentially earn profits. This is a phenomenon that is more appropriate for low-priced stocks than higher-priced ones.

The thing is, higher-priced stocks simply aren’t as volatile as a general rule. The companies tend to be more stable given their size.

Because of the smaller size of companies trading penny stocks, there’s a lot more built in volatility which can potentially allow you to grow your account quicker.

Don’t Use Leverage and Never Trade Too Big

Leverage refers to taking a large trading position with only a small amount of capital. I don’t like leverage, and don’t suggest it for penny stock trading.

Penny stocks are one of the least complex types of plays, so just about anyone can trade in this way. It’s an ideal starting place for traders, and leverage just really isn’t necessary.

Don’t Skimp on Your Trading Education

In the scheme of things, very few traders will make it big. Pursuing a day trading education can help stack the odds in your favor.

My Trading Challenge is an excellent way to get a quick education in the stock market, learn how to trade penny stocks and to get trading ASAP. I’m constantly sharing my trades, making new webinars, and giving advice and feedback.

In addition to the lessons, I’m also trading alongside my students with a small account so I can be at their level. It’s in this way that I continue to improve my teaching because I can approach the market from the same point of view as my students.

The Bottom Line

The entry into penny stock trading is easy, but learning how to trade penny stocks and trade effectively is a bit more complicated. There are many things to take into account before you get trading.

However, by taking the time to educate yourself, create a support network, and establish good habits, you’re setting a strong foundation for your future as a penny stock trader. Are you ready to get started?

Have you tried trading penny stocks? Why or why not? Share your feedback below.

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”