But what if you’re just getting started? Selecting the right penny stock picks can seem daunting, but I’ve prepared a guide to help you learn how to find penny stocks — ideally before a spike.
Let’s dig in.
Table of Contents
- 1 What Is a Penny Stock?
- 2 How to Pick Potential Penny Stock Winners
- 3 How to Pick a Potential Penny Stock Winner Pre-Spike
- 4 Rule #1 – Piggyback on stocks that have already spiked a little
- 5 Rule #2 – Look for potential breakouts that are reaching new highs
- 6 Rule #3 – Bet on price action
- 7 Rule #4 – Do your research
- 8 How to Select a Penny Stock Broker
- 9 My Favorite Platforms
- 10 How to Protect Yourself from Penny Stock Scams
- 11 Potential Penny Stock Payoffs
- 12 The Bottom Line
What Is a Penny Stock?
A penny stock is a non-traditional stock that trades off the major exchanges for less than $5 per share. Traditionally, you found them in the pink sheets — or the grey sheets — but today, you typically have more luck on the Over-the-Counter Bulletin Board, which is electronic.
OTC stocks aren’t governed by the SEC like stocks on the New York Stock Exchange (NYSE) or NASDAQ. They don’t have to publish balance sheets and other fundamental reports, which makes them more of a risk in the eyes of some traders.
I say that’s B.S.
In my opinion, they can actually be less risky because you can, for example, take a large position for a relatively low cost and potentially take small profits on every play. It can be a conservative, wealth-building way to invest in the stock market.
How to Pick Potential Penny Stock Winners
Stock charts provide the easiest way to find penny stocks. If you can read stock charts and find reliable patterns, you can sometimes see what a stock will do next.
Does it work every time? Of course not. That’s why they call it investing.
However, the more you learn and study, the more reliable your penny stock picks can become.
Where to Look for Penny Stocks
You can find a few penny stocks on the regular stock exchanges. The companies behind those stocks must meet the exchange’s and SEC’s listing requirements, and they have to trade at a minimum of $1 per share.
I prefer the aforementioned OTCBB. Find penny stocks that interest you, then conduct some basic research. How long as the company been active? What has its previous price movement looked like? Spend time studying those charts.
In many cases, you’re looking for a catalyst. Maybe the company is about to be bought out by a larger company, or perhaps the business has announced a new patent.
These catalysts often precede spikes. When traders figure out that the company might have something going for it, they frequently strike.
Share price and valuation contribute to a company’s market capitalization or market cap. Penny stocks are typically considered micro-cap, which means they have low valuation. But that’s not a bad thing.
Big-cap stocks are the major companies with huge valuations and high share prices. For instance, you might buy a share of Apple (ticker symbol APPL) for $200 per share. You can buy far more shares of a micro-cap stock at $2 per share.
Dilution occurs when the number of outstanding shares increases. When you’re learning how to find penny stocks, avoid buying or shorting stock in a company that has recently had a number of its options exercised or when lots of shares have just been issued.
How to Pick a Potential Penny Stock Winner Pre-Spike
Traditional stock traders buy low and sell high. My students often take things one step further, both buying low and selling high, and then selling short when prices begin falling and buying to cover.
While this can help us make a profit both on the way up and the way down, there’s one thing you need to know before you ever attempt this: learn how to find penny stocks before they spike.
If you want to go long and sell short, you must be able to identify when a stock is spiking. If you don’t know that it’s going up, you could still able to sell short at its peak — but then you’re only getting half of the profits. And if you can’t tell when the peak is happening, you risk getting squeezed on the position you’re holding long.
Basically, being able to tell when a spike is occurring is pretty important for penny stock traders.
Unfortunately, there’s no 100 percent guaranteed rule that tells you what every stock will do in every situation (and if you find something like that, give me a call!). But there are a number of signals you can use to predict when spikes will happen.
I’ve developed these rules in over 20 years of trading penny stocks. Learn them. Love them. And use them as you work toward being a better penny stock trader.
Rule #1 – Piggyback on stocks that have already spiked a little
One of the quickest ways to identify a spike in the making is to start by finding a stock that’s already moving. Think about it. Which would you rather do: sit around staring at empty charts, waiting for breakouts to appear out of thin air, or use the many research tools out there to find stocks that are already moving?
If you notice that a stock has begun to trend up a little, you can, for example, buy in before the spike and take your profits once the breakout happens.
It works more often than you might think, especially if your stock charts show previous instances of the exact same thing happening.
Rule #2 – Look for potential breakouts that are reaching new highs
I’m always looking for stocks that are breaking out to new highs — especially those that are still up on the day and holding the morning high. You have to be careful with this, though.
If, for example, you see a play like this on a Friday afternoon and the stock’s still holding its morning high, there’s always the potential for a short squeeze into the close there.
I talk about Friday short squeezes a lot more in my TIMTactics videos, so check them out. It’s a play that all penny stock traders need to learn to recognize and avoid.
It’s also why I typically avoid the buy-and-hold strategy. I’d rather get out with small profits or even small losses than risk huge losses by holding too long. Sometimes, when potential breakouts reach new highs, they can’t maintain their price above the previous resistance level.
Rule #3 – Bet on price action
Here’s how a lot of people try to predict that a spike is happening: They hit up their favorite chat room to see which stocks other members think are moving or how high they think certain stocks are going to go.
Or maybe they buy alerts off another “guru” who tells them when to buy based off the spikes they’re predicting.
Now, I’m not saying that chat rooms are all bad. I’ve made tons of money off the plays that the students in my group have found and posted about for the whole community to see.
But ultimately, chat rooms are just that: places for conversation. What you really need to aim for a stock’s price action.
Price action gives you the real story about a stock. Is it breaking out to a new high? Has it crossed its VWAP? All the news sites in the world won’t tell you when these things happen, but a stock’s chart movement will.
Believe it or not, watching price movements can be educational in and of itself. It sounds boring, but you’ll start to see patterns you wouldn’t have caught otherwise. Make it into a game. Which way do you think the stock price will move next?
Once you’re confident in your efforts, consider putting money down on your predictions. Alternatively, try paper trading at StocksToTrade and get a feel for how it works without the risks.
Rule #4 – Do your research
I hate to say it, but a big reason most penny stock traders fail is because they’re lazy.
They don’t want to do the research that my students learn how to do. They want someone to tell them what to do, but what do you think happens when you get your tips from someone who’s passing the same information out to thousands of other subscribers?
By the time you get the alert, everyone else has moved in. So good luck getting your trades executed at the numbers you need to make a profit.
I don’t want to give you fish. I want to teach you how to fish. That way, you can learn how to find penny stocks on your own.
The thing is, if too many people jump on board with a stock, they begin to influence price movement. That’s not a good thing. Your goal is to buy a large enough position to make a decent profit, but not to make a difference in what the stock does next.
You might know that a particular penny stock has spiked before because of news. For example, let’s say you get wind of a major shakeup at the company, so you turn to the charts. You’re pretty sure it’s going to spike, so you go in for several thousand shares.
This is how I’ve watched my some of my students earn massive profits by learning how to find penny stocks. They do the research and figure out what plays are most likely to result in profit.
This is One Horizon Group Inc. (OHGI):
Recently, OHGI had a little spike that held around $1.80, thanks to news about downloads of its communications app (OHGI’s product is an international competitor to Skype, Whatsapp and others). I’m not super knowledgeable about tech investing, but that tells me that this is a stock that moves on news.
So, the big question is, when will the next news come?
First, I went to OTCMarkets.com to look up the stock’s filings and disclosures. I saw there the stock had some new SEC news in their filings. It turned out that the company was about to do a presentation at an investor conference. Based on their S-1 filing, I knew that they only had a few million in cash and that they were looking to raise more from a new funding round.
But what was really interesting to me was the copy of the presentation that I reviewed because I took the time to dig into the SEC filings. In particular, the company included a slide showing a feature comparison matrix that put OHGI ahead of their big-dollar competitors. And a company that puts out a better product than services like Skype and Whatsapp? That’s one that deserves my attention.
So I knew that this was a stock that had spiked before on news, and I knew that news was about to come out about the company’s investor conference, thanks to the presentation I viewed ahead of time. I bought in anticipation of the hype, and sure enough, when the press release came out the next day, the stock spiked.
I didn’t see it going all the way to $5 a share, but some of my students did — and they made way more money on the deal than I did. And they did it because this was pretty much a textbook setup. All of the signs and signal were there — you just had to do the research to find them.
So what can you learn from these rules?
Proper Preparation is Key
Most penny stock traders won’t go to all the trouble of digging into a company’s SEC filings. They won’t take the time to read through presentations, let alone try to interpret what all the information found there means.
And that’s why most penny stock traders will bankrupt their portfolios.
Don’t be like most traders. There’s nothing fun or sexy about me recommending that you do your research. If I was trying to sell you a get-rich-quick solution, I’d fail, because there’s nothing to help you get rich quick with my approach.
But do you know what my approach does involve? Success.
Success requires hard work. It requires determination. It requires the ability to do what other people won’t do in exchange for the kinds of rewards those traders will never enjoy. Proper planning isn’t fun, but it’s necessary.
If you’re willing to take an extra half hour to learn everything you can about a penny stock and the company behind it, you’ll be more informed than most traders. Plus, you’ll have extra insight into the best entry and exit points so you can potentially profit more than the other traders out there.
Learning how to find penny stocks is just the beginning. You also need to know how to analyze them.
Think Like a Retired Trader
If the rules I’ve listed above tell you anything, it should be that I don’t make a move unless there’s a damn good reason.
I don’t buy into a stock because I read online that I should. I only make a play when the signs line up and when my research tells me that the setup I’m looking at meets the criteria for my patterns.
These opportunities don’t come around often (and they’re coming around even less as we move into a more bearish market). That’s why I like to think of myself as a retired trader.
I’m not going to come out of retirement for a so-so stock play — just like a retired athlete isn’t going to come back to play for a minor league team. I don’t waste my time, and neither should you.
The rules above — along with the other guidelines I teach the students in my Trading Challenge — often show me when good opportunities are happening. I listen to them because they’ve shown me time and time again that I can make good money if I stick to the system that’s helped me make me millions of dollars in trading profits.
Thinking like a retired trader will stop you from making emotional plays. You might get fidgety or anxious when you haven’t been able to find good penny stocks for days, so you start looking for a reason to trade
Don’t fall into this trap. It’s how traders lose everything they’ve built.
I can teach you these patterns, but I can’t teach you the discipline it takes to be a successful penny stock trader. Only you can do that.
If you’re ready to give it a shot and put in the time and energy needed to develop a successful mindset, join me today to learn the rules and patterns that could help you pave your way to financial freedom.
I’m looking for my next successful student, whether you want to make millions of dollars or just set aside a few bucks for retirement. Whatever your goals, you can benefit from learning how to find penny stocks in a supportive environment.
How to Select a Penny Stock Broker
The best penny stock brokers allow you to profit from your trades without paying too much in fees and other expenses. They’re also supportive and provide a user-friendly interface that you can navigate easily as soon as you sign into the platform.
What Do You Need to Look At?
There are lots of other qualities you need to consider before selecting a penny stock broker. Just as you must do your research to learn how to find penny stocks, you also have to research brokers to figure out what they offer.
Does It Have an Online (And Mobile) Trading Platform or Is it Simply Call-and-Trade?
I don’t know about you, but I don’t want to have to pick up the phone and place a call every time I want to enter or exit a trade. First, it takes too much time. Second, I prefer to execute trades myself.
Find out whether you’ll have access to both an online and mobile version of the broker’s app. That way, you can access your trading account whether you’re sitting at home in your pajamas or lounging by the pool at a hotel in Fiji.
You’ll definitely want to know what you’ll pay for every trade you execute with a broker. The best penny stock brokers charge by the trade — not by the share. In other words, you’ll pay the same if you’re buying one share of Company XYZ or 4K shares of Company XYZ as long as you execute the trades at the same time.
At least, that’s true when you first start.
Frequency of Trading Mandated by the Broker
You probably won’t have to worry about this. High-frequency trading systems use complex computer algorithms to execute trades based on specific criteria. But you’re going to do your research and learn how to find penny stocks yourself.
If your broker requires you to trade at a certain frequency, bow out. As I mentioned before, you need to think like a required trader. If the stars don’t align, don’t trade.
Many online brokers don’t require a minimum deposit anymore. Of course, you’ll have to fund your brokerage account if you want to trade.
Some brokers, such as Interactive Brokers, charge a minimum deposit of $10,000 or more. They’re designed for high-volume traders — particularly those who want to trade on margin — and aren’t appropriate for beginning traders.
My Favorite Platforms
If you’re just learning how to find penny stocks, I recommend signing up for two platforms. One is a trading tool that helps you learn how to find penny stocks, read charts, find patterns, and otherwise learn the ins and outs of the industry. The other enables you to trade.
I might be a little biased, but I think StocksToTrade has more features and benefits than any other trading tool on the planet. You can use it for everything from paper trading to price event alerts. It’s ideal for getting your feet wet and figuring out how the stock market works.
StocksToTrade is also beneficial for veteran traders. You’ll have access to more data, better-quality information, and even the major stock exchanges.
I’ve used TDAmeritrade many times over the years. It’s ideal for people who are just learning how to find penny stocks because it’s easy to use, there’s no minimum deposit, and you don’t have to maintain a minimum balance.
How to Protect Yourself from Penny Stock Scams
Assume that a so-called guru is a scam artist until he or she proves otherwise. If the person is always ranting and sending out mass emails about so-called “no-risk” penny stock picks, run in the other direction.
Penny stock scams usually involve artificially inflating a penny stock’s price so the promoter can profit. Nearly everyone else loses because they’re not aware of the scam.
To protect yourself, listen only to people who want to educate you. If they’re spouting B.S. about get-rich-quick schemes or foolproof methods, they don’t have your best interests in mind. Trust me.
Potential Penny Stock Payoffs
I think it’s pretty clear that penny stocks can pay off in a big way. Will you get rich tomorrow? Probably not. But you can potentially develop a system that works for you and builds wealth over time.
I turned just over $12,000 into more than $4.7 million in profits. Some of my top Trading Challenge students have profits well into the seven figures, and many more have six-figure gains.**
The Bottom Line
If you learn how to find penny stocks accurately and consistently, you might do well in the market. Over time, if you see profits add up, you’ll find yourself even more motivated to do the research.
What’s your favorite way to find penny stocks?