There’s no denying the allure of penny stocks, especially for new investors without ample capital to really move the needle with higher-cap stocks that are trading for hundreds if not thousands of dollars.

Penny stocks allow you to take advantage of leverage. You can invest $100 and see massive percentage gains from small price movements. But, can you make money on penny stocks, or is it too good to be true?

You can absolutely make money trading penny stocks. You just need the right approach. We’ll walk you through how to make money with penny stocks in this guide, from understanding fundamental vs technical analysis to implementing a stock software to do the heavy lifting.

First, what is a penny stock?

What is a Penny Stock?

Before you can learn how to make money on penny stocks you need to know what exactly you’re investing in. It may surprise you to learn that these don’t always trade for just pennies. The term simply defines any stock that trades for less than $5 per share.

These stocks are typically issued by small-cap or micro-cap companies that are in the early stages of growth. Or, in other cases, they’re associated with financially unstable businesses that have fallen on hard times.

The way in which you trade penny stocks tends to differ from others, like safe dividend stocks. They’re commonly traded on over-the-counter (OTC) markets like the OTC Bulletin Board (OTCBB) or Pink Sheets, instead of major exchanges like the NYSE or NASDAQ.

Don’t worry – we’ll explain what this means for you in just a few moments when we get into how to make money with penny stocks.

What sets penny stocks apart is their low price and high volatility. This offers tremendous upside potential, with dramatic price swings that can result in large percentage gains – or losses – over a short period.

Just be aware that these opportunities come with high risks since penny stocks tend to have limited liquidity and less regulatory oversight, making it tough to find reliable financial insights.

Can You Make Money on Penny Stocks?

Now, can you make money on penny stocks? Technically you can make money with any investment opportunity. The likelihood of making money, and how much money you can make, are two separate stories though. No investment strategy is foolproof.

That being said, there’s a reason more and more people are interested in learning how to make money on penny stocks. Their low share price means that even a small increase in price can yield substantial percentage gains. Let’s say a stock priced at $0.10 rises to $0.20 – you’ve just doubled your investment.

Penny stocks are sometimes aggressive growth stocks. Savvy investors who do their homework can find companies with massive upside potential before the rest of the market becomes aware of the opportunity. Easier said than done, of course – that’s why you need a good stock picker.

But we do want to help you set your expectations. Just like we touched on in our guide for how to make money with options trading, there are no guarantees associated with penny stock trading.

Success in trading penny stocks hinges on not only timing, but also careful research and analysis to identify companies with solid fundamentals, upcoming catalysts, or potential in emerging markets.

This is a strategy that aligns with more active investors who don’t mind getting in the weeds on a daily basis monitoring their positions and looking for emerging opportunities. You’ll likely use a short-term investing strategy, like swing trading vs day trading.

The Risks of Investing in Penny Stocks

Just as with the pros and cons of dividend stocks or the pros and cons of swing trading, you also need to be aware of the downside associated with penny stocks.

While you can make money trading penny stocks, you can just as easily lose money. The same high volatility that makes these attractive investment opportunities can also pose a threat, threatening to erode your entire position in just moments.

This can of course be mitigated with careful risk management, which we’ll cover as part of our guide on how to make money with penny stocks. Still, it goes to show that trading these stocks can be stressful.

There’s also the issue with liquidity. There are fewer buyers and sellers for these types of stocks compared to a more consistent, predictable asset like monthly dividend stocks to hold forever. That means you could have trouble exiting your position at a price that you want.

The other major issue associated with penny stocks is a lack of information and transparency. The smaller companies they’re associated with may not need to meet the same reporting standards as larger firms listed on major exchanges. So, you’re trying to find your way in the dark in many cases.

The OTC markets these stocks are traded on are also less regulated, leaving them more vulnerable to fraud and scams. Pump-and-dump schemes are an example of this, where a stock’s price is artificially inflated before insiders sell off shares at the peak, leaving regular investors with losses.

So, you’ll need to weigh the pros and cons for yourself and determine if this is really the right beginner stock investing strategy or not. But if you do decide you want to learn more, you’re in luck. We’ve put together a great guide on how to make money on penny stocks below.

How to Make Money With Penny Stocks

Making money with penny stocks is actually fairly simple. That doesn’t mean it’s easy, but the steps to making profitable trades are fairly straightforward and repeatable. Once you get the hang of it you’ll see that it’s rinse, wash, and repeat.

But before you can make that first trade, you need to open a brokerage account.

Choose the Right Platform for Penny Stock Trading

Not all brokerages support penny stock trading since they’re not always associated with reputable companies. Do some research into platforms that offer access to the OTC markets and tools specifically tailored for trading these high volatility stocks.

Some options you might consider are Interactive Brokers, Fidelity, and TradeStation. These are all great choices, some of which are free stock analysis websites with low or no commissions at all. These fees can easily eat into your profits if you’re not careful, so compare your options.

While you’re at it, consider other important details like fast execution and real-time data. We mentioned already that penny stocks move fast, and you can’t afford to miss a beat.

This is why ultimately, we recommend setting yourself up with a more sophisticated investment app for beginner or seasoned traders.

Set Yourself Up for Success With Research and Analysis Tools

Making money with penny stocks on a consistent basis hinges on your ability to uncover winning opportunities day after day. While you can certainly combine fundamental and technical analysis and do things the old-fashioned way, we prefer working smarter rather than harder.

The best stock analysis app streamlines your approach to analysis and saves you time and stress, helping you win more trades with less effort. While there are plenty of options at your disposal, your search ends here at VectorVest.

Our stock advisory monitors more than 16,000 stocks on a daily basis and puts them through our proprietary stock rating system. This gives you clear, actionable insights in just 3 ratings: relative value (RV), relative safety (RS), and relative timing (RT).

Each sits on a scale of 0.00-2.00 with 1.00 being the average, allowing for quick and easy interpretation. Better yet, the system issues a buy, sell, or hold recommendation for any given stock at any given time.

This eliminates any guesswork, emotion, or human error from your decision-making. But it doesn’t just help you analyze opportunities, it uncovers them for you on a daily basis with a database of stock screeners working around the clock.

While you can use these to uncover penny stocks to make money with, you can also find the best stocks for covered calls, best stocks for Roth IRA, undervalued stocks, best blue chip dividend stocks, the best short term stocks, you name it. We even have a list of the best penny stocks under 10 cents!

Don’t leave anything to chance when trading penny stocks. Make life easier on yourself and win more trades with less work using our iPhone stock app or Android stock app. Take advantage of this free stock analysis today and see what VectorVest can do for you!

What to Look for in Penny Stocks

Now, what are the characteristics of a good penny stock trading opportunity? There are a few different things you need to be on the lookout for. The first is volatility, which is what will present the buying opportunity.

But you also have to make sure the stock is liquid and traded in high enough volumes that you can buy and sell at the prices that align with your trading plan.

There are plenty of industries you can search for, but we see investors have the most success with biotech or tech stocks. These are typically companies in the early stages of growth rather than those that have fallen on hard times and are on their way to the bottom.

Whatever you do, avoid stocks that have no product or no revenue – these are often the most speculative. Use common sense, too. If a stock’s price has risen dramatically without any real reason, it might be artificially inflated by bad actors looking to profit at your expense.

Mapping Out Entry and Exit Points in Advance

Timing is everything when it comes to how to make money with penny stocks. You need to have your entry and exit points mapped out in advance before you even execute your trade.

This will prevent you from getting in your own way or trying to make decisions on the fly and missing your window of opportunity. Here’s what to consider:

  • Entry Point: Use technical indicators like support levels to identify a good entry price. Entering too early can expose you to further declines, while entering too late compromises potential profits.
  • Exit Point: Set a target price where you’ll take profits if the stock moves in your favor. Many traders also plan for a scaled exit, selling portions of their position as the stock rises. This way you can continue to benefit from increases to share prices without the frustration of watching all your profits erode from a sharp decrease.

Having a pre-set exit strategy ensures you lock in profits and don’t fall victim to the “hold too long” trap, where greed causes you to miss your chance to capitalize. Better yet, eliminate yourself from this process altogether with stop-losses and take-profit orders.

Managing Risk and Emotion With Stop-Losses and Take-Profits

Having a pre-determined entry and exit strategy isn’t enough to ensure things go smoothly. If you’re trying to manually enter and exit positions, you’re leaving profits on the table and exposing yourself to unnecessary downside.

Instead, use automated stop-loss and take-profit orders. A stop-loss helps you cut losses and automatically sell a stock if it falls to a certain price. This minimizes downside risk and prevents emotional decisions like holding on to a losing position in the hope of a rebound.

On the other hand, take-profit orders are great for those who find themselves getting greedy and trying to squeeze every cent of profit out of their trades. They force you to cash out when your profit target is reached.

The benefit of these tactics is to eliminate human error and emotion. You can take this a step further by utitlizing dynamic trading stops, which will update in real-time as market conditions shift. ProfitLockerPro is a great option, which can be integrated with the VectorVest system.

Starting With Small Positions and Scaling Up Over Time

We know you’re eager to dive in now that you know how to make money on penny stocks, but take your time to scale up slowly. Penny stocks experience wild price swings, and starting small lets you minimize risk while learning how to navigate the market.

Better yet, try paper trading first – this is basically simulated trading in real-world conditions with fake money. This way, your mistakes don’t cost you a cent!

You can gradually scale your position sizes as your confidence and experience levels rise. We recommend diversifying the bulk of your stock portfolio towards safer, more predictable assets as well.

Wrapping Up Our Guide on How to Make Money on Penny Stocks

We hope this overview of how to make money with penny stocks has left you feeling clear and confident in this method. While the potential for rewards is high, so too is the risk. You need to follow a tried-and-true strategy and leverage technology to increase your odds of success.

You can learn more about where to put retirement money after retirement, how to pick good stocks for short-term, what drives stock prices, swing trading strategies, stock market sentiment, best day of the week to buy stocks, best time frame for swing trading, are financial advisors worth it, and more in our blog.

At this point, though, the only thing left to do is put what you’ve learned in this guide to making money with penny stocks to the test. Set yourself up with a VectorVest subscription and see firsthand why it’s the #1 toolkit in your trading arsenal. Get the edge you need today!