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What Are Penny Stocks? A Complete Guide To How Penny Stocks Work

Penny Stocks, the booming investment many look to as trading companies like Robinhood are beginning to see much higher numbers in user rates. But what are penny stocks and how do you get these small investments to turn into large assets. Are penny stocks a safe investment to start looking into?

A stock in a company essentially means you own shares within a business. Because of this, public companies will allow people like you and I to own shares so that they can continue to operate and expand their businesses.

How Do Penny Stocks Work?

So, you’ve decided to look into trading penny stocks? The good news is that penny stocks did not acquire the name for being expensive. To qualify as a penny stock, the stock must be less than $5 a share. While the price per share is very low, these stocks are extremely volatile and have little to no regulation.

More Information on Penny Stocks:

Who Should Invest In Penny Stocks?

While the stocks may have little to no regulation, it doesn’t mean that you shouldn’t look into investing in them. After all, Apple was a penny stock with shares as low as .80 cents in the beginning. However, before making any investment decision, you should thoroughly research and company and stock that you choose to buy shares in.

  • Average Person: With penny stock shares being so low, the shareholders vary quite heavily. With some being your everyday person, not looking to add too much into their portfolio. Penny stocks for the everyday investor just might be the ultimate betting ground to the beginning of their trading. 
  • Day Traders: The type of stocks might also be for the day trader who understands the market and has studied the company. These traders may often reap more in profits than others because they understand how volatile the market is for these stocks and aren’t looking for long term investments
  • Large Investment Funds: Maybe these stocks are for those who do have a lot to spend and are more than willing to take the risk of putting down $12,000 on a stock worth $.10 to maybe see it double to $.20.

Whether you fall into one of these categories or not, penny stocks are traded by millions everyday in hopes of maybe having quick success in the market. However, penny stocks are inherently much riskier and have increase volatility.

What Is an Example of a Penny Stock?

Penny stocks are typically traded as OTCMKTS, but there are a few that trade over the NYSE. Apple itself was a penny stock, trading lower than $.80. So let’s look at one of the most successful penny stocks as an example. 

Back in the early 2000s, Apple was a small company which many people hardly knew of. With stock prices finally fitting around $8 after the release of the ipod, Apple broke out of being a penny stock to becoming one of the most valuable stocks on the market. 

Not all penny stocks will hit a winning streak like Apple, as a matter of fact most will fail. But there are true penny stocks on the market that just might become the next big buy.

Can You Make Money With Penny Stocks?

Making money with penny stocks is possible, but not everyone has success with them. Penny stocks require a lot of research. Because there is little regulation, many find themselves involved in schemes put on to seem like there will be success.

Before you spend your hard-earned money into any shares, READ, READ, READ. Going past the headline for a news article just might save you hundreds of dollars on a bad stock.

Are Penny Stocks Risky?

It’s important to note that many of these penny stocks will not hold up over time. Because of this, it is advised that any investment spent into the market should be with money you are prepared to possibly lose.

How To Invest in Penny Stocks

Today, buying stock is as easy as opening up your phone and just downloading an app. Many of these investment apps link with bank accounts and some even offer debit cards. TD Ameritrade, Robinhood, Acorns and E*Trade are just a few of the investment apps available today. 

Do Your Research

Before buying these stocks look them up, and no I don’t just mean google them. The OTC market website and bulletin board is a great way to begin your research. By doing so, you’ll have the ability to choose from stocks that the otc recognizes. 

Engage In Trading Chat Rooms

Trading rooms are extremely important if you want to see your account grow quickly and somewhat safely. Trading chat rooms are groups of people who organize information that is then analyzed to determine the best trades.

While there are many groups offering free information, some groups may require high entrance fees to enter. But the fee compared to the amount you’ll be making is worth every penny.

Select a Brokerage

Which fits your investment style the best. With so many brokerages available, today picking the best one for yourself can be tricky. When it comes down to it, pick the brokerage based on your investing style.

While that may not be so simple with the abundance of offers and waived fees. The options are full of great businesses that will serve you a lot of value. 

Learn More: Best Brokerage Accounts

Choose Which Stocks To Trade

Picking the right penny stocks at this step should be relatively easy. Using connections in trading groups and reading into companies that interest you will make the process easier. The right stock will always be the one you’ve researched and never the one you just look at the headlines for.

Start Trading

Trading stocks is much easier with online brokerages offering commission-free trades. Now that you have a better idea of what to expect, dive into the market and remember to do your research. Once you find the right strategy to invest into, choose the amount you’re willing to start with.

If you’re like me and aren’t willing to spend too much on penny stocks, start with just a few hundred dollars. See what you can grow in your first few months on your portfolio. If you think you’ve developed enough knowledge, reinvest your money.

Monitor Stock Prices

Read the reports daily to determine the best move for the day or week. While doing so, keep yourself updated on any alerts. Because anything can happen with a penny stock, keeping notifications on through the brokerage mobile apps will help you stay up to date on what’s going on with your money. 

What Are the Benefits & Disadvantages of Penny Stocks?

Now that we’ve looked at what penny stocks are and how to get started with trading them. It’s time to note the benefits of trading available penny stocks and the disadvantages. 


  • They are dirt cheap!- let’s say for instance you don’t want to invest into the stock market with thousands, then you have an opportunity to enter the market with less capital up front
  • You could be a part of a groundbreaking company. (Chances of that are pretty slim)
  • Doubling and tripling your money is more possible with penny stocks. 


  • Welcome yourself into the world of risk. The chances of success are slim and you might just lose a large portion of your investment. 
  • There isn’t as much regulation when it comes to the companies providing these stocks
  • Be aware of schemes with little to no research on these companies, you might just lose your hard earned money.

Consider Guidance From a Financial Advisor

Financial advisors can help you create concrete strategies to gain and or grow your money. While working with a financial advisor your risk will be substantially lower. This is a great option for those who do not understand trading and do not want control over their account.

Penny stocks are a risk, if you know the market you may just have a better shot at making money. But the idea to these types of stocks is to not think of it as a long term investment. They should not be held for long periods of time. 

Deciding on investing in penny stocks is all about setting aside time to understand the market. For those who are willing to learn and dive into trading, penny stocks are a good way to see your invested money quickly multiply. But if you are not careful, your hard-earned money may be lost and you’ll be left with possibly more than half of your investment gone.

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Trade With Real-Time Market Data — TradeStation!

Free stock trading - intuitive stock trading tools. Cash bonus for new accounts (conditions apply). Open an account today to unlock your trading potential.