Penny Stocks are technically defined as stocks priced below $5. However, a more common definition for a “penny stock” is one that trades below $1 and in several cases, even below a penny.

It is often implied, but isn’t necessarily true, that penny stocks are also micro caps with capitalization of less than about $250 million, and is therefore capable of creating vast wealth. Penny stocks are actually found across the full range of capitalization from micro caps to large cap stocks.

As a group, micro cap penny stocks are generally avoided by large funds since prices are very easily affected by sizeable buy and sell orders. Also, capitalization is too small to affect a large fund’s bottom line. Also, there are insider responsibilities involved in buying more than 10% of a publicly held company so to avoid this, large funds usually don’t take up penny stocks – not even the micro cap ones.

While the penny stock market poses a higher degree of risk than the major stock exchanges that trade large cap stocks, they also provide tremendous profit potential for individual investors with small amounts of capital, if they make wise trading decisions. Here are some tips that can help you profit when trading penny stocks:

• Be Diversified! Never put all of your eggs in one basket. Try to invest in at least 5 different penny stock picks at a time. If you have $5,000 to invest, put $1,000 into each stock. When one is sold, replace it with another hot penny stock.
• Never fall in love with a stock! Stick to your plan! If a one of your penny stock picks hits your target price, start using a “Stop Loss”. If the stock continues to climb, move your “Stop Loss” with it. When it stops out, go on to the next penny stock. We have more information on our stock terminology page.
• Be happy with smaller percentage gains! Even if you make 3% to 5% on a stock, it can really add up. Let’s say you make 5% on a one of your penny stock picks every two weeks. That’s a 10% gain on your investment each month or 120% each year! Don’t try to retire on that one hot penny stock purchase. Penny stock investing rewards add up quickly in a relatively short time.
• Use Limit orders to purchase stocks! A market order can execute at a price you may not like. If a breakaway gap takes place at the open, you could be stuck holding the bag. If you sell a large position at the market, your penny stock order may get filled at a price much lower than expected.
• When looking to buy or sell a stock at the market opening, be patient! If you are looking to buy a penny stock, notice how a lot of stocks open strong, rise for about an hour and a half, then start to dip. Then for the next hour things will start to stabilize. Then after the market has been open for two and a half hours, it will start to climb again. Use this same information for selling a penny stock investment. If you missed a selling point when it first opened, wait for that two and a half hour point and see if the penny stock price starts to rise again.
• Never chase a penny stock investment! When a penny stock pick is hot and takes off leaving you behind, let it go! If it never looks back, go on to the next hot penny stock. There are always more stock to buy. Penny stocks are high risk, high gain offerings, by nature quite volatile, and may not recover after a pullback.
• Don’t ride a penny stock into the dirt! If you are down 10% to 15% on a penny stock position, it’s time to cut your losses and get out. If you are well diversified, you will have other promising stocks to help you recover your losses.
• Do not buy a stock based on the number of shares you can buy! We see too many people buying a $0.50 penny stock pick because they want to own 2,000 shares. It doesn’t matter what the price is, remember you are out to make a percentage on your stock investment.