Penny stock investors like them because of their volatility. Even with a small investment, they allow for a diversified portfolio. However, penny stocks are issued by companies with small market caps, making investments associated with high risks.
Penny stocks are typically not found on major exchanges, but rather traded on OTC. A brokerage account is a prerequisite for trading in these stocks. Our review will provide guidance on finding the best penny stocks, developing a trading strategy, and selecting a broker.
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Best Penny Stocks Right Now
Here is a list of the top 10 penny stocks, selected based on their maximum average daily trading volume over the last 3 months. The value of these securities ranges from $1 to $5.
| Ticker | Title | Price, $ | Market capitalization, $ mln | Average daily trading volume, $ mln |
| TCBP | TC Biopharm (Holdings) Plc | 1,87 | 0,912 | 3,33 |
| VTNR | Vertex Energy, Inc. | 1,225 | 114,555 | 3,195 |
| HRTX | Heron Therapeutics, Inc. | 3,185 | 478,798 | 3,093 |
| PBM | Psyence Biomedical Ltd. | 1,69 | 22,416 | 3,04 |
| FGEN | FibroGen, Inc. | 2,04 | 205,247 | 2,739 |
| VNET | VNET Group, Inc. | 2,00 | 514,728 | 2,511 |
| FREY | FREYR Battery, Inc. | 1,505 | 212,519 | 1,989 |
| REI | Ring Energy, Inc. | 1,80 | 357,271 | 1,942 |
| DCGO | DocGo Inc. | 3,655 | 379,703 | 1,699 |
| MDAI | Spectral AI, Inc. | 2,26 | 36,826 | 1,675 |
As of 3/14/2024 from finance.yahoo.com.
What is a Penny Stock?
Penny stocks represent inexpensive securities issued by little-known companies with a low market capitalization, often less than $300 million.
There is no exact definition of the term. It is commonly used to refer to stocks that are valued at less than $5, or sometimes to securities priced at $1 or less.
Speculative stocks may not be the most suitable option for long-term investors due to their tendency to experience significant growth or decline, often by 50% or more in a single day. This is because of low trading volumes and limited liquidity, which can make it easier to manipulate stock prices.
Nyse and Nasdaq list a few penny stocks, but most are traded on the over-the-counter market through an OTC bulletin board rather than on the major exchanges. These stocks are sometimes referred to as pink sheets.
Exchange-listed securities must meet a certain value requirement. at least $1. If quotations remain below this level for over 30 business days, delisting procedures will be initiated. When selecting assets, consider this risk.
OTC stocks have a disadvantage due to the lack of financial disclosure requirements. Small companies provide less reporting than stock market giants. Therefore, it is difficult to analyze their business performance.
Compare Penny Stock Brokers
A broker is a middleman who gives a trader access to the exchange and/or OTC market. For day trading of securities, it is best to choose companies with low commissions per transaction. It is recommended to pay attention to online brokers, as many of them do not charge commissions when trading stocks.
When selecting a broker, consider the markets they provide access to and any additional fees, such as portfolio management fees.
The table below compares the leading brokers.
| Title | Rating on the nerdwallet.com service | Commissions |
| Fidelity Investments | 5 | 0% for stocks and ETFs |
| Interactive Brokers | 5 | 0% within IBKR Lite$0.005 per stock, but not less than $1 on other tariffs |
| Firstrade | 4,4 | $0 per trade |
| Robinhood | 4,3 | 0% for stocks and ETFs |
| SoFi Active Investing | 4,3 | $0 per trade |
Features to Look For in a Penny Stock
For long-term investments, it’s important to consider more than just the share price. The potential for growth in prices and dividends should also be evaluated. Otherwise, you may end up with an unprofitable asset.
Answer these questions for penny stock buying:
- Does the stock trade on a major exchange or in the over-the-counter market?
- What does the company do?
- Can fundamental factors lead to the growth of quotations?
- What is the average daily trading volume?
- Does the business generate a profit?
A trader who follows a short-term strategy may find information on trading volumes relevant.
Trades on a Major Exchange
Trading penny stocks on major exchanges is preferable because listed companies must meet minimum SEC requirements. Oversight of issuers whose securities are only available in the OTC market is weaker.
Additionally, major exchanges impose requirements to the:
- number of shares in free float;
- year’s trading volume;
- market capitalization;
- corporate governance structure;
- financial performance.
Nyse and Nasdaq are the best places to find penny stocks. Companies must meet strict requirements to be listed.
The Company Looks Legitimate
Intra-day speculation aside, it is important to consider the business’s overall quality. In analyzing the quality of a business, it must be legal and viable. Information about the nature of the business can be obtained from sources such as customer feedback, company news, and social media.
Find the Catalyst
Penny stocks often grow in a ‘pump and dump’ scheme. These assets are suitable for intraday trading but not for long-term investments.
Sometimes fundamental reasons can be the catalyst. For instance, the launch of a new product or expansion of the sales market. It is an opportunity to purchase these companies at a lower cost.
A High Daily Trading Volume
Trading volume is a crucial indicator in the stock market as it affects the liquidity of a stock. Stocks with low trading volumes may be challenging to buy and sell, as there may be no counter bid in the stack.
A small trading volume leads to a high spread between the buy and sell price. As a result, the investor risks losing part of the potential profit. Or he may have to wait a long time for a buyer.
The top penny stocks are those with daily transactions measured in at least hundreds of thousands of dollars.
A Positive Earnings per Share
The EPS is calculated by dividing the net income by the number of outstanding shares. A positive EPS value indicates that the company is generating income from its operations, while a negative value indicates that it has not yet reached the break-even point.
Penny stocks are often issued by young companies or businesses near bankruptcy, resulting in infrequent positive EPS. Large companies with expensive stocks may also have a negative multiple.
If you decide to invest in an unprofitable issuer, pay attention to other financial indicators. These include the level of debt, P/S, and P/B multiples.
Can You Make Money With Penny Stocks?
Making money on penny stocks is possible. However, for inexperienced investors, it can be like playing the lottery.To profit from short-term trades, you need to have a good understanding of technical analysis.
Traders with small capital may find stocks worth a few dollars interesting. Theoretically, these stocks offer the opportunity to earn tens of percent per day,even without leverage.
Strong price movements can often be the result of scams or low liquidity, which can make it difficult for traders to sell assets in time. Typically, during a bump, organizers profit more than private investors.It’s important to note that the price of an OTC stock can fall as quickly as it rises.
For long-term investments, it is necessary to know how to assess a company’s financial stats. Promising start-up stocks are appealing for this purpose. When selecting these stocks, consider the following:
- business plan quality;
- the project’s novelty and competitiveness;
- opportunities for profitable partnerships with large investors;
- market expansion prospects;
- current risks.
An investor should understand the industry they are exploring and remember to diversify. Even the most promising project on paper may go bankrupt in reality.
Penny stocks are not always securities of a startup. They may be supported by a small business with no growth potential. A low stock price can sometimes be the result of a company’s financial problems.
How to Invest in Penny Stocks
Penny stocks represent high-risk assets. Even professionals find it difficult to select promising ones. Therefore, most traders prefer to profit from quotation volatility by searching fordeals using technical analysis methods.
There are 3 steps to follow before you start trading:
- Learn to read the charts. Learn how to identify candlestick patterns and technical analysis figures. Also, study indicators and their usage.
- Develop a trading strategy.
- Test the trading strategy on a demo account.
Bank traders often utilize price action trading, which does not require the use of indicators. This method relies on a specific combination of candlesticks to generate buy/sell signals.
A trader must be able to read price action regardless of the strategies used. Candlestick patterns can indicate a change in trend or the imminent realization of a technical analysis figure.
A trading strategy should answer all of the trader’s questions. For instance, how to determine stop loss and take profit levels.Risk management is a crucial component of the strategy. It is necessary to set the percentage of the deposit that can be invested in the asset. Additionally, it is advisable to determine in advance the acceptable ratio of profitability of the transaction and risk, as well as the parameters at which the position will be opened.
Testing a strategy on a demo account is crucial before entering the stock market. It helps traders identify flaws and weaknesses in their strategy. However, a successful test does not guarantee profits. When trading with real money, the psychological factor comes into play.
To solve this problem, formalize the strategy as much as possible. The strategy should include 3-4 measurable conditions for entering a position.
Demo simulators are not perfect, which can contribute to failure in real trading. When placing a limit order in real trading, it will be further back in the queue compared to practicing on a demo.
3 Common Myths About Penny Stocks
Many novice investors are misled by the myths surrounding penny stocks, resulting in financial losses due to a lack of understanding of the financial instrument. In this article, we will debunk the three most common misconceptions.
1. “Penny stocks have high potential, but they’re undiscovered”
Over-the-counter security stocks have the potential for fundamental price growth. However, not all of them are hidden gems.
Penny stocks are often priced low due to the issuer’s problems. It can be challenging to find a company worth long-term investment in this category. Popular stocks with low volatility offer a better chance for profit, albeit with smaller earnings and lower risks.
2. “If the stock goes up just $1, I’ll double my money”
From a mathematical standpoint, this statement is accurate. However, in the context of the stock market, it may not hold true. A security’s value can double due to various factors.
Many penny stocks are unlikely to experience a sharp increase in business efficiency and potential profit. It is slim that a newcomer will find a startup with great prospects.
The second reason for the doubling of the stock’s value is technical. Insiders may manipulate the market with a pump and dump scheme, or it could be a one-time event. It is unlikely to predict which company will be affected. Technical analysis can help identify assets with strong price movements, but closing positions at the right time remains a challenge.
3. “This $1 stock is cheaper than that $100 stock”
This statement is misleading.Professional investors use multiples to determine high-priced stocks or cheap ones. Stocks with a low price-to-earnings ratio (P/E) are considered cheap if the P/E is less than 25-30. Such a security is more favorable than a penny stock in a loss-making company.
The profitability of a long-term deal depends on the growth potential of quotations and the company’s ability to pay dividends, not the value of the asset.
If an investor invests $1000 in 5 stocks and the quotes drop by 10%, they will lose $100. Similarly, if another investor invests $1000 in a penny stock and its price falls by 10%, they will also lose $100. However, the probability of the second event is theoretically higher due to low liquidity.
Penny stocks are highly volatile and may interest traders with limited capital, typically less than $100-$200. Their low cost allows for easy portfolio diversification.
Bottom Line
Understanding the business and finding promising small companies can be difficult, even for experienced analysts. To make money with penny stocks, beginners should stick to securities available on large stock exchanges. This approach will help you avoid falling victim to out-and-out frauds.
To profit from penny stock volatility, you must have a solid grasp of technical analysis. However, penny stocks are unpredictable and have low liquidity, which increases the risk of not being able to close a position at a favorable price.
OTC stocks are not suitable for beginners due to the risks involved. Although individual securities can show significant growth, trading them is challenging and can be risky. It is important to find and execute deals quickly.
