How to Find Penny Stocks Before They Explode - Modest Money (2024)

Penny stocks are the very definition of a high-risk, high-reward investment asset. Figuring out how to find penny stocks on Robinhood and other major stock trading platforms that will soar is challenging, but there is a way to do it.

Understand that nobody can predict which penny stock might explode or when. Don’t put all your money into a penny stock on a wing and a prayer. These are risky assets that could amount to nothing.

Tread with care and ensure you have thought through your strategy before putting your money on the table.

Where To Find Penny Stocks

Penny stocks are not always easy to find. Traditional brokers often refuse to feature them on their platforms. Although Charles Schwab and TD Ameritrade do provide support penny stocks, it was only through their growing popularity.

For example, in February 2021, trades in penny stocks rose by 2000% as more retail traders entered the markets.

Today, plenty of brokers provide you with access to penny stock companies, or nano-cap stocks. Our favorite broker for free penny stock trading is Robinhood.

5 Tips for Developing a Penny Stock Trading Strategy

Like any stock trade, you need a basic strategy that all other trades will revolve around. Purchasing a penny stock because some online analyst said it was a great deal is a mistake.

Implement the following five tips to develop your over-the-counter stock trading strategy:

• Choose which industry you will specialize in. Select something you have an understanding of.
• Back up recommendations with your own research. Don’t take penny stock recommendations at their word.
• Be strict on setting stop losses with your broker to avoid being wiped out.
• Make sure your trades play into your broader investment portfolio.
• Avoid hype trading. Hype shows a stock that could potentially take off, but by the time the average person gets hyped up it’s already too late.

It’s also wise to start paper trading to give yourself an idea of how the penny stock market works. There are plenty of paper trading apps that will allow you to test out any new strategies you come up with.

What Makes a Promising Penny Stock?

The penny stocks of today are all potential diamonds in the rough. Remember, not every broker deals in penny stocks, so you’ll first need to find one that does. Weigh up the trading costs to ensure the deal makes sense.

Furthermore, since finding the next big penny stock comes with such a considerable risk, you’ll need to be prepared to learn how to use a stock screener to decode all the information you have at your disposal.

So, let’s dive into the characteristics that make up a promising penny stock.

Look for the Hype

Penny stocks are highly volatile because of their low share prices. Any piece of good or bad news can set them spiking or tumbling.

All successful penny stocks start their meteoric rise due to hype. Word of mouth and media buzz are the fuel that power rising penny stocks. For example, if a celebrity backs an unknown company, it’s enough to change the face of that company.

However, there’s a big difference between real news stories and a buzz on social media. A social media buzz tends to illustrate organic growth, whereas little local news stories often fade as quickly as they appeared.

Many stock screeners and research platforms, such as Benzinga Pro, come with built-in custom newsfeeds to help you find the latest news whenever it appears. Check out our full Benzinga Pro review.

Watch the Trading Volume

Using a platform like TradingView, you can monitor trading volume on penny stocks. Start by watching the trading volume of a stock over a longer horizon, such as six months to a year. These figures will give you the baseline activity of what your penny stock’s trading volume usually looks like.

Check out our TradingView review.

Increasing trading volume is a sign that something is about to happen. More volume means people are taking up positions in anticipation of something.

Of course, it’s also important to monitor if they’re buying or selling. If most people are selling, that’s never a good sign. You want people to be buying because, remember, other investors are also looking to get in early and find the next big penny stock.

Are there Any Recent Moves?

Intelligent traders are continuously monitoring the biggest gainers in the previous trading session. Unless you took a punt, it’s unlikely that you’ll be able to get in at the very bottom of the market. Instead, you want to be part of the first or second wave of stock purchases. Any later, and you’ll likely miss the boat.

In a trading session, the top percentage gainers illustrate that a penny stock could be about to take off. It doesn’t always work this way, of course, but it’s a good sign that the rocket fuel is firing, and the stock is about to shoot for the moon.

Penny Stocks and Risk

By its nature, all stock trading comes with risk. Penny stocks come with elevated dangers because they are unproven. Companies with lower share prices are often smaller, have less staying power, and don’t have the following to reassure investors that they will thrive five years from now.

Apple and Disney will never shoot up by 500% in six months because they are already there. Penny stocks, on the other hand, might. Likewise, they might not, and the company could disappear.

When investing in penny stocks, you will have far more losers than you will winners. Never invest more than 5% to 10% of your portfolio in these assets.

Conclusion

Finding the best penny stocks is more an art than a science. It’s an exercise in luck, and few investors can convincingly find the most profitable penny stocks the majority of the time. There’s a reason why traditional investors shun them.

However, if you use what market data you have available, there’s a good chance you could pick the next big winner. If you do, your profits could change your life forever.

Are you interested in any penny stocks right now?

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