How to trade penny stocks for beginners

When you want to enter the trading niche and have been doing some research, you may have come across penny stock trading as a low-cost, quick solution to your needs. As with any style or strategy, there is a lot more to take into consideration than just entry prices, so it can be worthwhile for beginners to do some significant due diligence before jumping in.

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Penny stocks put simply

At first glance, penny stocks are the shares offered by start-ups, small public companies and sometimes by bigger, well established names that are sometimes considered to be struggling. If you find shares trading under £5, these will typically be classed as penny stocks and you can put some collateral forwards in the hopes of making a profit if market sentiment improves and prices rise.

Not all trading platforms support penny stocks and those that do may charge more as a result. Leveraging can be used to take on a higher volume of trades and in penny stocks, this can be a way to mitigate some of the risks. The trader will only need a small deposit on a trade, often known as a margin, and supports the rest of the value using the money borrowed. This comes with its own risks of course, namely that losses are calculated across the entirety of the trade’s value and not just on your personal portion.

Pros and cons

There are a host of pros and cons for beginners to think about before getting started with penny stock trading and these are:

Pros:

Fast trading with little waiting times for profits/losses
Lower entry point for new traders
Leverage can be utilised
Profits can be made overnight with the right selections
Potential for portfolio diversification

Cons:

Fewer platforms to choose from when trading
High volatility
No track records for many companies
Low trading volume and liquidity
Leverage has its own disadvantages to add on top
Lack of information in the niche can make it difficult to implement strategies

If trading penny stocks seems like a good idea for your particular trading needs, you can read more here.

Risk management:

Ensure you have researched the market and company you’re looking to trade
Utilise stop losses to protect yourself from large losses
Make use of demo accounts and trade with virtual cash first

How to start trading

Once you have a good grasp of the risks vs rewards of penny stock trading and decide to give it a go, it may be time to find a reputable platform to trade on. As mentioned above, it can be more difficult to find one that allows this trading type, as opposed to an endeavour like spread betting. To ensure the site, your money and personal info are secure, look out for client testimonials, security certification and regulation from authorities like the Financial Conduct Authority (FCA).

It can be important to take factors like customer service, usability and even site speeds into consideration, too. Look out for a demo trading feature, as getting familiar with a site’s trading features and how penny stock trading works without risking your money can act as part of a solid risk management strategy.

There is often a focus on following trade signals and going with market sentiment when using other forms of trading, but this can be the opposite when using penny stocks. It can be far more worthwhile to make your selections based on your own research and many skilled traders would suggest picking a niche that you are familiar with. Doing this can increase your chances of understanding how and why a new company has the potential to grow, as opposed to choosing an industry that you have no knowledge in.

It can be a good idea to know when to close positions and trade with a level head, as holding assets isn’t the best strategy to have. Many assets can suddenly rise and fall in the trading environment, but if the value drops in penny stocks, there is little chance of things picking back up again.

Penny stocks can pose larger losses than profits, so it can be important to define the risks vs rewards and just how much money you can dedicate to your efforts. Leveraging can increase your chances of making a profit, but should also be researched to ensure you understand the separate risks involved.

Disclaimer:

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets work and whether you can afford to take the high risk of losing your money. Marketing is not intended for US citizens as prohibited under US regulation.Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK