How to Buy Penny Stocks for Beginners: 10 Secrets of Seasoned Trader!

How to Buy Penny Stocks

If you are a beginner investors looking for ways to learn how to buy penny stocks, this article is for you. Check out our top 10 secrets of seasoned traders below:

1. Read Penny Stocks for Dummies Book by Peter Leeds

One of the most comprehensive and step-by-step reads you will find on the market breaking down for the newbies on how to buy penny stocks and not lose money. A lot of people try trading without really understanding what to look for in penny stocks or what to what out for. The author did a great job about introducing beginners to all the nitty gritty of the small cap market.

2. Try Paper Trading First

That’s right! You heard us correct. Before you get your feet wet and invest with real penny stock companies, pretend you have a set amount of money and you start investing but on paper. Make a list of penny stocks and record their prices on a certain day, hold them and sell according to a strategy you pick for yourself and see what happens in real life. Depending on whether you lose or gain will dictate your future actions on how to buy penny stocks.

3. Find a Broker

If you start searching for a broker, you will find hundreds if not thousands of hits. How do you find the best broker? The only way to find the best broker for you is to cross compare the top brokerage companies on the market. If you are just starting out and penny stock trading is more of a hobby than a business for you, then finding a discount broker might be a great option for you. Some of the most important aspects to look in a broker are account minimum balance, transaction fees and trading volume limits. Ameritrade and E-Trade are some of the most popular online brokers to consider due to low transaction fees, commission and customer service.

4. Set a Trading Budget

One of the most commonly asked questions is “how much money should one invest in penny stocks?” Most penny stock analysts will explain that it all depends on an individual’s investment goals, risk tolerance and many other considerations. Generally, an average investor will put between $500-$1,500 in a single penny stock transaction to keep investment risks low and to build a nicely diversified portfolio. Because investing in small cap stocks is a very risky venture, your penny stocks list budget should not go over 5% of your total financial portfolio. Once you set the budget, stick with it to avoid potentially catastrophic losses in the future. It’s better to take a small loss and move on rather than risking your entire investment portfolio. One of the best pieces of advice on how to buy penny stocks is to make sure your trading volume is high enough to justify transaction fees and commission.

5. Ignore Penny Stock Newsletters for the Most Part

Most of the information presented in many penny stocks newsletters is geared towards pumping up certain stocks and raise their prices, which could seriously be scams or companies not really worth investing into. About 75% of penny stock e-mails, infomercials or penny stock promoting in any shape or form is very dangerous for your portfolio. If somebody is trying to advise you of a particular stock, chances are they have a personal profit in mind and not your financial well being. Even Warren Buffet warns against “urgent investments” when somebody is trying to push you into buying a quick gain investment, the answer should be a quick “no”. Unfortunately, that is the truth and only your personal education and diligence will make you succeed on the road of learning on how to buy penny stocks.

6. Watch out for Penny Stocks Pink Sheets

Pink Sheets are perhaps some of the riskiest forms or investment that can only be compared with jumping off a plane without a parachute. This is the only way to compare an investment into something that has zero data on. This is exactly what’s happening with pink sheet companies that are not obligated to file financial reports with SEC so there’s very little data available for investors to analyze. The only way to insure the legitimacy of certain company is to invest with the ones listed with NYSE, NASDAQ of OTC Market Bulletin Boards.

7. Keep a Detailed Trading Diary

Recording detailed trading data will help you analyze whether a certain strategy was successful or requires some changes to make it more profitable. Some of the most seasoned penny stock traders have been keeping trading diaries for years helping them note the trends that are working for them to repeat them again and again.

8. Call the Company You are Thinking to Invest In

One of the simplest yet most effective secrets in learning how to buy penny stocks is to actually contact their investors relations department and ask why you should invest with them. This way you will know that the company is legitimate and there are people behind it. Ask them your most burning questions and listen how they answer.

9. Stay Away from Sectors You Know Nothing About

Sure biotechnology or medical marijuana stocks might be penny stocks on the rise, however if you have very limited understanding about this particular field, you might not be on top of your game. The best piece of advice on how to buy penny stocks, is to stick to the fields you personally understand which will ultimately help you analyze a particular company for growth patterns.

10. Do Not Invest in Penny Stocks for the Long Haul

This strategy might be great with solid and stable companies, with penny stocks you want to utilize a completely different strategy. Some of the pros recommend getting in, skimming the cream and exiting while penny stock prices are still on the rise. This market is just too volatile and a lot of companies go bankrupt taking you with them.