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Questions and AnswersUnderstanding Penny Stocks

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Beginner Level Questions

What are penny stocks?

Strangely, there is no solid definition for penny stocks. As previously described in Chapter Two of Understanding Penny Stocks, there are three different criteria that various individuals and organizations use to delineate and define penny stocks, and what is considered a penny stock really depends with whom you are dealing.

Price Per Share
Market the Equity Trades Upon
Market capitalization

Click here to read the complete definition as described in Understanding Penny Stocks.

Do I need a broker to trade penny stocks?

Yes, to trade penny stocks you will need a broker. It is easy to open an account with them, and then it is simply a matter of giving them your buy and sell orders. This can be done online with most discount brokers, which is the method that I highly recommended.

You can read all about stock brokers, and trading penny stocks in Chapter Two of Understanding Penny Stocks.

What is the difference between a discount broker and a full service broker.

We have described the major differences here. We strongly suggest that you use a discount broker, especially if you are trading penny stocks. Here is a list of the top-ranked discount brokers for penny stock traders.

How do I get a broker?

Choosing a broker is the first step. Hopefully I have made it easier with the section on top-ranked discount brokers for penny stock traders. Once you have settled on the one that best meets your needs, you simply need to open an account. The brokers know that the more painless their sign-up procedure is, the more customers they will attract. You will probably be pleasantly surprised at how simple it is to get started.

Most discount online brokers will allow you to sign up on the Internet, and it should not take very long at all. Just fill out the forms, and make an initial deposit, and you are ready to buy your first penny stocks!

What do I look for in a broker? As a penny stock trader, what should I consider important?

I have examined the topic of brokers in detail in Understanding Penny Stocks, and you can read all about them in the following sections of Chapter Two: Getting a Good Stock Broker, and Where to Research Stock Brokers.

Can I learn about penny stocks without risking my money?

Absolutely, and I encourage starting off risk-free. Too many investors dive in head first, then have nothing left once they have learned the game. I have included a detailed look at Paper Trading in this book, which allows you to learn all about trading penny stocks without risking a dime.

What is paper trading and how do I do it?

Review our full discussion on Paper Trading here.

Where can I get quotes, charts, and news releases for the penny stocks I am interested in?

We have a detailed examination of the best places to get information on your favorite penny stocks in Chapter Seven, Information Sources.

How much time do I need to monitor my investments and research new stocks?

I have seen penny stocks make moves of 300% in one day, and others languish for years without a volatility of more than 40%. It depends on the penny stock in question, the driving factors (like the state of the market, investor sentiment, and sector influences), and your own opinion of the types of gains you would consider significant.

PennyStocks.com uses an analysis of the state of the market, investor sentiment, and sector influences in its research to pick the best penny stocks for its members. These, along with all of the other factors (insider trading, shifts in social trends), are combined with their proprietary fundamental and technical analysis strategies to uncover the best penny stock picks for their subscribers. You may want to go to PennyStocks.com and see what picks they have waiting for you.

How long does it take for penny stocks to show significant gains?

How do I buy penny stocks?

This is described in detail in Chapter Two, in the section entitled Buying Penny Stocks.

How do I sell penny stocks?

This is described in detail in Chapter Two, in the section entitled Selling Penny Stocks.

What is a market order?

Market orders are explained in Chapter Two, in the section Trading Stocks.

What is a limit order?

Limit orders are explained in Chapter Two, in the section Trading Stocks.

What type of investors are penny stocks most suited for?

I have looked into this topic in the section entitled Why Trade Penny Stocks, and have even included a suitability quiz.

Where do penny stocks trade?

I have dedicated an entire section of Understanding Penny Stocks to this question, and have titled the section (very appropriately I would say), Where Do Penny Stocks Trade?

What is the minimum amount of money required to start trading penny stocks?

You would probably be surprised how often I am asked this question. I usually field this same query about ten to fifteen times a week.

The short answer is zero! You can start trading penny stocks with no money at all, and learn the ropes all at the same time by starting with our paper trading strategies.

When you decide to make that jump to real money, here is what you need to know: The minimum depends entirely on the broker you select. They may require that you make a minimum deposit to open an account (ie-$1,000, $500), while others will let you open an account with no money at all.

Sometimes brokers also have minimum amount per order (ie- $500 per buy transaction minimum or else they won't process it, or they may charge you a huge commission), but that is very, very rare.

When you are ready to put real capital into the penny stock markets, you need to decide how much you want to invest. We suggest, mainly to keep the effect of brokerage commissions down to a small percentage of the total, to invest anywhere from $500 to $1,500 per penny stock. This keeps your exposure to each stock low, and allows for diversification even if you only have a few thousand. (If you get a $20 commission to buy $30 worth of stock, it will not be worth your time and energy, especially as you consider you will take another commission to sell. Your $30 of stock would need to go to $70 just to double! Make sure to invest enough to minimize the effect of commissions).

In our opinion, more experienced traders that have larger portfolios at their disposal can go as high as $2,500 per penny stock, but that is a personal decision that should be based on your own investment objectives, sensitivity to risk, and trading aggression.

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