3 Things Every Penny Stock Trader Needs to Know in 2021
Investing in penny stocks in 2021 can be difficult if you don’t have the right information on hand. And while looking at penny stock watchlists can help with inspiration, the best way to be confident in your strategy is to make the watchlist yourself. You’re probably wondering; well, how do I find valuable penny stocks? Where do I even start? And these questions are easily answerable if you know where to look.
Now, we’re not knocking the use of online watchlists by any means, because they are great tools to use. But, there is value in knowing what goes into it. You wouldn’t eat a meal without knowing what ingredients are in the food? So why mess around with not knowing what ingredients go into making a watchlist? Now, there are a few broad topics that can be greatly expanded upon in this regard.
And, it’s worth noting that this is a very abridged version of how to make a penny stock watchlist. But, with so many penny stocks on Robinhood or wherever you buy stocks under $5, being able to narrow down a list of the best ones to watch, can help to make your profit potential even higher.
While we won’t get into it right now, it’s also worth having a trading education to do the work after you’ve compiled a watchlist. This means understanding how to trade penny stocks, how to make a profit with penny stocks, and more. So, considering all of this, let’s talk about how to make a penny stock watchlist.
How to Make a Penny Stock Watchlist
- Setting Up a Stocks Under $5 Scanner
- How to Research Penny Stocks
- Understanding Current Stock Market Trends
- 3 Penny Stocks to Watch Right Now
1. Setting Up a Stocks Under $5 Scanner
Scanners are the best ways to find penny stocks to watch. This is an undeniable fact that is known throughout the investing ecosystem. Ask any pro trader and they’ll tell you that they use scanners every day of the week. For those unfamiliar, stock scanners can be set up on many different applications. The best in my opinion is ThinkorSwim, which is a platform made by TD Ameritrade. This all-in-one trading platform is useful for buying and selling penny stocks. However, one of the main draws of it is its intensive scanning software.
On ToS, investors can set up a scanner using almost an infinite amount of inputs. But, for the most novice traders, you might want to begin simply putting in under $5 and volume over 1 million. Well under $5 is straightforward, volume may not be as simple of a concept for those new to trading. Essentially, volume is the number of shares bought and sold on a given trading day. While many penny stocks have low volume (under 500,000), others trade well above 1 million shares per day.
Low volume is not necessarily an issue, but it has a direct correlation to liquidity. For example, if a company only trades 50,000 shares in a day, it may be extremely difficult to buy in or sell and exit a trade at certain price targets.
Additionally, the stock will make large jumps throughout the day as opposed to small incremental ones multiple times per second. High volume equals high liquidity and vise versa. While using this method to scan for penny stocks is relatively simple, it can help to create a broad watchlist of which companies to start looking at.
How to Research Penny Stocks
After making a broad list of penny stocks to watch, the next and arguably the most important phase is research. While research is specific to each company, there are some broad topics that we can cover.
The first topic to keep in mind when looking up a company is speculation. Speculation is comprised of external factors impacting a company’s stock price. This includes press releases, corporate filings, balance sheets, any news, and more. Basically, this is anything announced by the company or found out by investors.
Because penny stocks are very volatile, they tend to be swayed easily by any events that occur. For this reason, it’s important to stay up to date and even invest in a real-time news aggregator. The next step is to research the fundamentals. This means looking at and thoroughly understanding the numbers that a company posts on its balance sheet. In a balance sheet, investors will see data such as EPS, profitability, EBITDA, revenue, operating costs, any financing that has occurred, and more.
While it may seem complicated at first, looking through the data and defining what the different categories mean, can help to offer a complete picture of a company. And, this is the best way to know exactly what you’re getting into. So, once you’ve taken both of these steps, you should be able to narrow down your list to somewhere in the 10-20 range. However, it may be pertinent to pick somewhere around 5 just to start.
Understanding Current Market Trends
Making a list of penny stocks to watch is not possible without understanding current market trends. As stated before, any stock under $5 will be more volatile than those above that price range. Because of their high volatility and speculation, geopolitical and economic factors will have a large impact on the share price. Right now, there are a few factors at play. For one, the pandemic and its past, present, and future effects on the stock market.
Because of Covid-19, investors have coined the term ‘reopening stocks’ to identify penny stocks that could benefit from economies reopening. These could be anything from entertainment stocks to food delivery companies and more. Next, we have the influence of retail traders. This influence is felt via Reddit penny stock forums and the effects of finding stocks on Robinhood.
On one hand, trading is more accessible than ever, and this is a major benefit to non-institutional investors. However, it has also resulted in more volatility, and larger price swings during intraday trading. While this should not serve to incite fear, it should help to address the creation of a trading strategy.
The last thing to consider in this regard is thinking outside of the box. When events happen, the results can sometimes be straightforward, and sometimes more complex. However, thinking outside of the box can help to find companies that could benefit from certain current events.
A more obvious example of this is the effect of Covid on certain penny stocks. This includes food delivery companies as well as online meeting platforms. At the end of the day, using trends can help to identify which penny stocks on your watchlist, could be better short or long-term plays.
3 Penny Stocks to Watch Right Now
- Vistagen Therapeutics Inc. (NASDAQ: VTGN)
- Ault Global Holdings Inc. (NYSE: DPW)
- Biolase Inc. (NASDAQ: BIOL)
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