How to Buy Penny Stocks. The Benefits and Strategies to Use When Buying Penny Stocks

This is a guide on buying penny stock. It's not for the faint of heart, but if you're willing to put in some time and effort it can be very rewarding. Penny stocks are shares that trade at less than $5 per share. They may have been around for years or they could just be starting. 

The best way to find them is by using an online broker like Interactive Brokers. You'll need to open up an account with one of their brokers first though. Once your account has been set up, then search through all the companies listed there. If any ticker symbols look interesting, click on those and see what kind of information is available about each company. 


This will give you a good idea as to whether this particular company is worth investing in. There are many different types of penny stocks so make sure you know which type you want before diving into the market. Some examples include:

Preferred Shares: These are usually issued by small businesses that don't have enough capital to issue regular shares. Preferred shareholders get paid dividends every year instead of receiving profits from the business.

Bond Issues: Companies sometimes sell bonds to raise money. When these bonds mature, the company pays off investors and keeps the rest of its cash. Bonds tend to pay higher interest rates than other investments because they carry more risk.

Equity Stocks: Equity means ownership. A shareholder owns part of the company and gets paid when the company makes a profit. Most equity issues are traded publicly and therefore offer better returns than preferred. However, most people prefer to invest in preferreds since they often come with lower fees.

Once you've found a few potential candidates, check out how much they cost. Make sure you understand exactly what you're getting yourself into. For example, do you really want to own a piece of a company? Do you think the price is too high? Are you comfortable with the fact that you might lose everything? All of these questions should help you decide whether or not you actually want to purchase a penny stock. Remember, no matter how cheap something seems, it doesn't mean it's safe! Always research thoroughly before making any investment decisions.


 If you still feel confident after doing your homework, go ahead and place your order. Your broker will probably ask you to deposit funds into your account first. Then he/she will send over a confirmation email telling you where to transfer the money. After transferring the funds, wait until the next day to log back onto your account. That way you won't miss anything important while waiting for the transaction to complete. Finally, once the deal goes through, you'll receive another email letting you know that your new holdings were successfully purchased. Congratulations! Now you're ready to start trading.

Benefits of buying penny stocks

There are several benefits to purchasing penny stocks. First, you'll always be able to liquidate your position quickly. Second, you'll never have to worry about paying taxes on gains made from selling your positions. Third, you'll avoid having to pay brokerage commissions. Fourth, you'll save lots of money by avoiding expensive mutual fund expenses. And finally, you'll enjoy peace of mind knowing that you aren't risking your entire life savings.

How to choose a broker

When choosing a broker, keep in mind that you'll be dealing directly with him/her. Therefore, you must select someone whose reputation is impeccable. Also, try to pick a broker who offers low commission rates. In addition, make sure his/her customer service skills are top-notch. Lastly, consider finding a broker who specializes in penny stocks. He or she will likely charge slightly more for such services, but it will definitely be worth it.

Penny Stock Trading Strategies

Now that you've learned all there is to know about penny stocks, let's take a look at some strategies you can use to maximize profits. The following sections provide tips on how to trade penny stocks effectively:

Use stop-loss orders

A stop-loss order allows you to set an upper limit on how far below market prices you'd like to sell off your shares if things don't work out as planned. This prevents you from losing even more money than necessary. It also helps prevent you from being forced to sell your shares at a time when their value has already fallen significantly. If you find yourself unable to hold on to your investments because you fear further losses, then this strategy may prove useful.

 Keep an eye on margin requirements

Margin requirements refer to the amount of cash required to open up additional positions. You'll usually need to post between 5% and 10% of the total dollar volume traded per share. However, many brokers offer lower margins so long as you maintain a minimum balance of $5,000. Be aware though that higher margin levels often come along with increased fees. So, if you plan on using margin, make sure you fully understand the terms involved.


 Avoid using leverage

Leverage refers to borrowing money against securities held in one's portfolio. For example, say you own 100 shares of XYZ stock valued at $10 each. By leveraging those shares, you could borrow 50 times the number of shares. Leveraging increases risk since any decline in the price of the underlying security would result in significant losses. But, leveraged investors tend to earn much larger returns compared to non-leveraged counterparts.

Consider options

Options allow traders to speculate on future movements in the price of a particular asset without actually owning the asset itself. Options give you the opportunity to profit or lose based on whether the option expires worthless, expires in the money, or expires out of the money. There are two types of options - call options and put options.

Trade only during market hours

Trading outside regular trading hours is generally not recommended due to reduced liquidity. Moreover, most brokerage firms impose restrictions on trades made after normal business hours. These rules help ensure that markets remain orderly by preventing large numbers of people from entering or exiting the same position simultaneously.

Don't invest too heavily into one company

If you're new to investing, avoid putting all of your eggs in one basket. Instead, diversify your holdings across different companies.

 Don't get greedy

If you want to be successful at penny stock investing, it's important to keep greed in check. Penny stocks aren't always easy to identify, which makes them attractive targets for inexperienced investors who lack proper research skills. As such, they should never be considered a safe bet. In fact, penny stocks have historically been among the worst-performing assets over the course of history.

 Understand what constitutes insider information

Insider knowledge can provide valuable insight into upcoming events within a specific industry. Insider trading occurs when someone uses inside information about a pending event to benefit themselves financially before other investors know about it. The Securities Exchange Act of 1934 prohibits insiders from buying or selling securities while possessing material nonpublic information.

Know where to look

Penny stocks trade online through various websites. Some sites specialize in offering penny stocks exclusively, whereas others focus on providing general financial news and analysis.

 Be patient

Penny stocks may seem like an exciting way to make quick profits, but there's no guarantee that these investments will pay off. It takes time to build wealth via penny stocks, especially given their volatile nature. If you don't stick around for the ride, you won't reap the rewards.

 Keep records

It's crucial to document every aspect of your investment strategy.

Final verdict

Investing in penny stocks isn't right for everyone. However, if you've got some experience under your belt and feel confident with your ability to analyze data, then this type of investment might work well for you. Just remember to do plenty of homework first!