Questions and AnswersUnderstanding Penny Stocks by Peter Leeds

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Beginner Level Questions

What are penny stocks?

Strangely, there is no solid definition for penny stocks. What is considered a penny stock really depends with whom you are dealing. The official definition is any shares trading for $5 or less, but most people use a much lower price level. Others will rely on one or a combination of the following criteria.

  1. Price Per Share
  2. Market the Equity Trades Upon
  3. Market capitalization

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.

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 for penny stocks is the first step to trading. Hopefully our discussion on brokers for penny stocks will help you. 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!

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 suggest paper trading, simply keeping track of trades using imaginary money. This allows you to learn all about trading penny stocks without risking a dime.

What is paper trading and how do I do it?

It is as simple as it sounds. Pretend you have $100,000 or some other figure, watch real penny stocks, and keep track on paper which ones you would have bought. See how it works out. Would you have made money trading penny stocks? What types of penny stocks were you attracted to?

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

We have a detailed examination of the best places to get information on penny stocks.

How long to monitor my investments? Research new penny stocks? See significant gains?

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.

How Do You Pick Penny Stocks?

We use Leeds Analysis, which considers the state of the market, investor sentiment, and sector influences in our research to pick the best penny stocks for our 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 our subscribers.

How do I buy penny stocks?

Learn all about Buying Penny Stocks here.

How do I sell penny stocks?

Learn all about Selling Penny Stocks here.

What is a market order? A limit order?

Learn all about market and limit orders with penny stocks here.

What type of investors are penny stocks suited for?

Discover if penny stocks are for you, by clicking here.

Where do penny stocks trade?

Click here to learn where 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 break even! 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.