Definition of Penny Stocks and 3 Trading Strategies to Master in 2022
If you’re like most stock market traders today, penny stocks are something to be familiar with. Now keep in mind that I say “traders” and not “investors” for a reason. In many cases, the price of these cheap stocks fluctuates quickly, more than your average equity. It is one of the main attractions for traders in particular. Under the right circumstances, they can use less capital in exchange for a higher percentage return. If you are new to trading, new to penny stocks, or a mixture of the two, you should start by learning the basics.
Penny Stocks Definition
In fgeneral, the term “penny stock” refers to the shares of a small company with a share price of $ 5 or less. Popular opinion associates these low-cost stocks with over-the-counter or over-the-counter trading. But there are plenty of stocks under $ 5 that trade on major stock exchanges like the New York Stock Exchange and the Nasdaq Stock Exchange.
You may have familiarized yourself with penny stock trading thanks to the attention paid to companies like AMC Entertainment (NYSE: AMC), Nokia (NYSE: NOK), Novavax (NASDAQ: NVAX), Cassava Sciences ( NASDAQ: SAVA) and countless other companies in 2021. These are just a few examples of stocks that have gone from under $ 5 to over $ 300 in some cases.
Learn more: What is the difference between OTC Penny Stocks and Nasdaq / NYSE Penny Stocks?
With a new year on the way, 2022 has become the year of the active trader. Almost daily, we see cheap stocks explode by 20%, 50%, 100%, or even more. While attending monumental movements like this is exciting, participating in and profiting from it is even more appealing.
How To Trade Penny Stocks
It all starts with learning how to trade stocks. Unlike larger market cap companies including Apple (NASDAQ: AAPL) or Tesla (NASDAQ: TSLA), penny stock trading is a bit more unique. You typically envision shorter time horizons for entering and exiting a trade. But there is also the potential for much longer-term investment when all the stars align.
Remember that the goal is to make money with penny stocks, so learning a different style of trading can be helpful in determining the type of trade (or investment) you are looking to make. Today we take a look at a few different techniques that active traders use to make money with penny stocks every day.
This is perhaps the most frequently used style of trading: day trading. As the name suggests, day trading involves buying and selling securities on the same trading day. The position is closed before the final bell, and nothing is held back overnight.
Thanks to the rise of retail traders over the past few years, millions of new accounts have been opened, adding even more day trading liquidity to the market. When you are actively day trading, liquidity is your friend. This is the number or number of shares traded in a particular issuer. The higher the liquidity, the easier it is to enter and exit a trade. This is essential if you are using a day trading strategy to make money on the stock market.
101 Pro Trading Tip: If you learn to trade daily, some platforms offer a way to do simulated trading and use fake money to practice your strategy. Even though you won’t make a lot of money on a winner, you won’t lose money if you make a mistake.
I would also like to mention another strategy that can fall under the “day trading” category: scalping. Similar to day trading, scalping involves buying and selling in the same session. However, unlike day trading, a scalper seeks to profit from small movements in stock prices over a very short period of time. Traders who scalp don’t look for big moves in the stock price, but rather small but frequent moves. Liquidity is even more critical for a scalper as it is imperative to enter and exit trades quickly.
Penny stocks can fluctuate in price quickly, and most retail traders will adopt day trading accordingly. However, no all penny stocks burst and collapse in a single session. Many continue to climb for days and even months.
Learn More: Penny Stocks Buying Guide for 2022, 3 Tips and Tricks
A strategy called swing trading is used to take advantage of these moves. Day traders will not hold “overnight,” but swing traders actively seek out trade setups that have the potential to hold overnight. This style has become popular with those who have a full-time job or cannot actively focus on the market all day. If you are looking to trade penny stocks, it is important to remember that things can change quickly.
One example is the overnight funding agreements. If the stock price rises substantially, companies will take advantage of the premium and arrange a stock offer with their banker. They will issue shares in exchange for the funds and generally offer them at a price lower than the current market price. If you are a swing trader, it can trick you if you are not sufficiently covered. The tricky part is that the offers are usually not announced in advance. So keep this in mind if you want to trade penny stocks.
Hold a core, swap a core
Some may think of this as a type of “long term” swing trading style. For others, it is more like an investment. The “Hold A Core, Trade A Core” approach is generally used by traders who wish to invest for the long term in a company. But, since penny stocks are always volatile, they may also want to profit from short-term trends. Let’s best define it with an example:
Trader finds out that PubCo A has done awesome things, raised funds, and thinks it could be a good $ 2 investment. They take a starting position in the company and the share price goes up to $ 2.50. This trader then increases to a full position and the average cost per share is $ 2.30; this is their core in this example. If the price climbs to $ 3.50, that trader sells part of the position to take advantage of the short-term move, puts the money in reserve and waits for another withdrawal to redeem. The idea is to keep the “core” at an average cost lower than the current market price. This allows the trader to stay in the trade longer while taking advantage of short term opportunities.
A “Hold A Core, Trade A Core” strategy would have worked perfectly for anyone looking to capitalize on the movement of over 8,000% of the Novavax stock between early 2020 and early 2021. This is not the case. single example, but it is a very popular referenced when it comes to the best penny stocks in recent history. Additionally, this strategy has also been referred to as “level trading” or cost averaging.
Are Penny Stocks Worth It?
With the right strategy, the right trading plan, and the know-how of the market, penny stocks can be worth it. If you can manage the risk, you’re already halfway there. Not all trading needs to be a home run and “tomorrow” is always a new day for making money on the stock market. The point is, whatever style you use, the goal is to generate profits.
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