Penny Stock Trading – The Full Guide 2025

Penny shares, also known as cent shares or penny stocks, are securities with a value of up to $5–$7 per share issued by small companies operating within a specific niche market. There are also transnational corporations that issue penny shares, but these are rather an exception. Penny shares are primarily traded on OTC markets, as they typically do not meet the listing requirements of major stock exchanges.

For penny stock investors, these stocks can be compared to venture capital investments. Some of these shares are issued just to meet specific technical requirements, while others exhibit high volatility and low liquidity, potentially losing more than half their value during a recession. However, some stocks with sound fundamentals can yield 50–100% gains within a few weeks. This review provides insights into the potential risks and rewards of trading penny stocks.

The article covers the following subjects:

Major Takeaways

• Penny stocks, according to the classification of the SEC (Securities and Exchange Commission) regulator, are micro-cap stocks worth less than $5. They may also be referred to as “penny shares” or “junk stocks.”
• Penny stocks can refer to small-cap companies with a narrowed focus to a particular region; shares of so-called “shell companies” that do not conduct activities; shares of companies created for speculative or fraudulent purposes; shares of weak companies with a market cap depreciated almost to zero. However, there are exceptions such as large firms that specifically issue a substantial volume of shares.
• Penny stocks are characterized by low trading volume, low liquidity, high volatility, a significant difference between buying and selling prices, and a strong dependence on fundamental factors.
• Microcap stocks are primarily traded in the over-the-counter (OTC) market. These penny stock transactions entail a heightened risk due to less stringent regulatory oversight, elevated commission rates from repositories and brokers, and the potential for wider price fluctuations.
• A small number of cent stocks are traded on exchanges and included in stock indices, such as the NASDAQ Composite Index (IXIC).
• It is generally advisable for novice investors to refrain from penny stock investing. To engage in transactions involving these stocks, it is essential to understand the associated risks, thoroughly assess the company’s financial health, review its product demand, and carefully analyze its financial statements.

What are Penny Stocks?

Penny stocks or cent stocks are securities of public companies, the value of which does not exceed $5. Shares worth $6–8 also belong to the category of “penny stocks,” but most often their value is expressed in cents, usually less than $1. Sometimes, investors and brokers also call these stocks “pink sheets.”

Main characteristics of penny stocks are the following:

• Issuers are mostly small-cap companies. According to the accepted classification, “small companies” have a market capitalization between $300 million and $2 billion. For issuers of penny shares, the market capitalization is usually several tens of millions of US dollars.

• You can find penny stocks in the over-the-counter (OTC) market. In the OTC, stock transactions are made directly between participants – online brokers, penny stock companies, and retail traders. The execution of the transaction is not guaranteed; the OTC market has no standardized terms, prices are rather approximate, and the cost of storage is higher. These are all additional risks. Some penny stocks are listed on exchanges, but their number is relatively small.
• Low liquidity and high spread. Purchased shares must be sold to someone. That is, it is necessary to find those who are willing to invest in cent shares. It takes time to find a buyer, sometimes forcing a seller to discount the shares.

Penny stocks can generate high returns quickly if a company has robust financial results, but they can also depreciate as rapidly.

Penny Stock Example

There are several examples of large company penny stocks:

• Ambev SA (ABEV) is the largest brewing company in Latin America and is part of the Anheuser-Busch InBev group. It focuses on the production, distribution, and sale of soft drinks and beverages. It operates in more than 18 countries. Its shares are listed on the New York Stock Exchange in the form of American Depositary Receipts (ADRs).

• Telefónica S.A. (TEF) is a Spanish telecommunications company that provides fixed and mobile telephony, broadband, and subscription television, and digital business solutions. It operates in more than 20 countries.

• Nokia Corporation (NOK) is a multinational technology company that designs and manufactures telecommunications equipment, software, and network solutions.

• Intesa Sanpaolo (ISP) represents one of the largest universal banks in Italy, offering all types of retail, corporate, and investment services.

Small-cap companies include:

• Coursera Inc (COUR) is an online course provider, a learning platform with paid and free courses. It has a relatively high popularity among self-education users and freelancers. At this point, the stock has actually turned into a penny stock due to a continuous long-term downtrend.

• Odyssey Marine Exploration (OMEX) is a publicly traded American company that specializes in the search and recovery of shipwrecks, historical artifacts, and valuable cargo from the ocean floor. It also specializes in the discovery, development, and mining of deep-sea minerals. The company represents a venture capital investment opportunity. Depending on the company’s results, its share price oscillates in both directions, allowing traders to earn from elevated volatility. The price per share is less than $1. The company is included in the NASDAQ index.

Large companies can be considered for long-term investments, while small companies can be suitable for short-term investing.

Common Myths About Penny Stocks

In this section, we will dispel some common myths about penny stocks.

• Only small-cap companies issue penny stocks. For the most part, this statement is true. However, there are exceptions. A penny stock is determined by the share price, not the size of the company. That is why you will find large issuers in the list of companies trading cheap stocks. For example, Banco Santander SA (SAN), the largest financial and credit group in Spain, is represented by subsidiaries in the US, Brazil, the UK, Mexico, and other countries. Its market capitalization is $88.42 billion, with the price of $5.8 per share.

A few years ago, the bank’s shares were valued at $2–$3. Following an extended period of growth, the valuation has decreased to less than $6, allowing us to consider it a penny stock.

• Penny stocks carry high investment risk. This statement is partially accurate, as small companies often lack the financial resources to withstand strong headwinds. However, this assertion is not entirely accurate. A small company can serve as a subsidiary of a large corporation, supplying specific components or providing specific services. Such a company’s small size is a result of its narrow focus on a specific area. These firms often have ongoing business relationships with larger partners, providing a stable foundation for their operations.

• Penny stocks do not attract investors and are not tracked by anyone. They are considered low-quality investments. A share price of less than $1 does not accurately reflect the company’s capitalization. The fundamental issue is the number of shares outstanding. For instance, the price of Crown LNG Holdings Ltd (CGBS) penny stock is $0.3. At this price, the company’s capitalization stands at $140 million. This is sufficient for the shares to appreciate twofold to remain in the penny stock category, but the company itself would be classified as small-cap, with a value starting from $300 million. The company’s shares are also included in the NASDAQ Composite index (IXIC).

The NASDAQ Composite index (IXIC) comprises shares of approximately 3,000 technology companies, including prominent names such as Apple, Tesla, and Microsoft. In addition, the index encompasses over 300 companies with securities valued under $5 per share, accounting for more than 10% of the total. This example illustrates that not all penny stocks are categorized as “junk stocks.”

Should You Invest In Penny Stocks?

Such a decision depends on your financial goals and risk profile. At the same time, you may find that blue chip stocks are more suitable. Blue chips are more stable investments, as they are consistently in the public eye. To generate revenue from penny stocks, it is essential to discern genuine, operational companies from those that are potentially fraudulent or “shell.”

In this connection, you should be able to find:

• Promising startups with innovative ideas.

• Companies that have the potential to be valuable partners or acquisition targets in the future.

• Companies that have a proven track record of success in their respective industries over several years.

Some companies can generate 100% gains over a relatively short period. However, the risk of falling victim to a “pump and dump” scheme or scam is significantly higher than in the case of investing in large companies.

Notably, penny stock companies do not offer dividend payments. While many blue chip and even some small-cap companies do pay dividends, this is not the case for cent stock firms as they usually use revenues and profits to maintain and expand their business.

What Are Potential Risks of Penny Stocks?

Penny stocks refer to shares that are traded in the market at very low prices, often attracting inexperienced traders and investors. A common misconception is that low-priced stocks are more available for purchase. However, stock investing in the OTC market comes with significant risks. These assets are not subject to the same stringent listing requirements or financial disclosure standards that apply to higher-priced securities.

The primary risks of penny stock trading include the following:

• Bankruptcy risk. Small companies are most often regional, operating in a narrow niche. These firms often lack the financial resources to establish reserves to mitigate the impact of unforeseen circumstances. During economic downturns and recessions, small companies are particularly vulnerable and often face challenges in maintaining their market presence, while large companies tend to diversify their business operations, which provides them with a greater degree of financial resilience.

• Unrealistic investment expectations risk. A notable example is the biotechnology industry. Biotech companies are often established with the singular focus of developing a specific drug. If the product falls short of expectations or fails during clinical trials, the value of the company’s shares can plummet sharply, and it will be particularly difficult to restore its reputation and win back investor trust.

For example, Sorrento Therapeutics Inc (SRNE) is a clinical-stage biopharmaceutical company developing treatments for cancer, autoimmune, inflammatory, and neurodegenerative diseases. In 2020–2021, the company’s stock was valued at over $14, generating a return of over 500% in a short period. However, a failed partnership with another company and legal issues ultimately led to the company’s bankruptcy.

• Penny stock fraud and scam schemes. Among small companies, there may be companies created either for the purpose of fraud, such as illegal transactions, tax evasion, and other schemes of cash flow manipulation, or for speculative purposes. These entities may also be “shell” companies with no significant assets or operations, or their turnover exists only on paper. For example, Special Purpose Acquisition Companies or SPACs, also known as “blank check companies,” are created specifically to raise capital through an IPO with the sole purpose of acquiring an operating company, allowing the target company to go public without a traditional IPO.

• Pump and dump scheme. This involves creating a buying frenzy, “pumping” the stock price, and then “dumping” shares by selling them at the inflated price.

In August 2023, American golf club maker Sacks Parente Golf (SPGC) held an IPO, and its shares skyrocketed by 624%. This surge can be attributed to heightened expectations, effective advertising strategies, and the role of speculative capital. However, the stock depreciated within a month.

• Risk of investment error. Some companies only operate on paper. These entities file reports and maintain nominal revenue, thus remaining listed with regulatory authorities. However, such companies may not actually be operational, and some may even be in the process of bankruptcy. Investing in such penny stocks without a thorough analysis entails a significant risk.

The primary risk associated with this investment is that you could either earn a high income or completely lose your investment. The probability of either outcome is almost 50%. While there is no assurance that cent shares will appreciate significantly, they may decline to nearly zero. In contrast, blue chip stocks typically exhibit a more stable growth pattern, with relatively short periods of decline. However, blue chips tend to recover over time, while cent shares generally do not rebound.

Penny Stock Market Analysis

The penny stock market can be described as follows:

• Bearish price trends. For the purposes of this experiment, we have selectively analyzed the charts of 30 penny stocks from the NASDAQ index. While the sample pool is limited, the overall trend is evident: shares exhibit significant price spikes during the IPO or in the subsequent period, followed by a decline with almost no recovery. Among small-cap companies, there are relatively many former small companies that are currently close to bankruptcy.

• Lack of full transparency. Of the 30 companies in the sample, only 18 were found to have more or less comprehensive information, and most importantly, news. For the remaining 12, only general information is available, with no information published by the media. Therefore, statistics on OTC market companies are not in favor of micro-cap stocks.

• Limited availability. Investors have two options: they can either engage with the high-risk OTC market, where the “game” lacks clear rules, or they can seek out alternative investment opportunities with stock brokers, though trading volumes in small increments may not be financially viable. When an inexperienced investor has to choose between penny stocks and blue chips, or cryptocurrencies, the choice is obvious. The second point to consider is that CFD brokers rarely offer penny stocks, while cryptocurrencies or blue chips are accessible to a wider audience.

Given the rise in stock indices and the emergence of promising cryptocurrencies, it seems unlikely that the OTC market will be able to attract new investors in penny stocks. As a result, the outlook for small companies as a whole remains vague. While some companies may demonstrate upside potential, it is not clear whether pursuing them is a worthwhile endeavor.

Penny Stock Cost Management

The strategy employed in trading penny stocks involves short- and medium-term approaches. Let’s take Plug Power (PLUG) shares as an example.

The chart above shows that there was one spike followed by a prolonged downtrend, confirming the typical bearish pattern.

The chart below reflects how the stock was trading within the last six months:

During several periods, investing could generate substantial returns, with some movements capable of delivering returns above 30% within a single month or even doubling your investment over a period of just 3–4 months.

How to invest in penny stock:

• Initiate penny stock trades after the price rebounds from lows. In this example, a strong support level and the subsequent rebound from it can be seen on the chart.

• Maintain a risk-averse approach and avoid taking excessive risks. 50% of the trade is closed when the price reaches the first resistance level. In our case, you can close 25% of your position at the second resistance level and leave the remaining 25% in the market, while setting a trailing stop.

• Stay informed about relevant news, as it can significantly impact market growth. In addition, speculative capital fluctuations can significantly impact market trends.

• Use additional tools such as pivot points, trend lines, and patterns.

When considering the potential for financial gain using volatility, you should take into account the low liquidity. For instance, if you purchase shares at $1.6, it may be challenging to sell them promptly at a high of $3.2. At the same time, slippages can occur.

Can You Make Money With Penny Stocks?

When considering whether to buy penny stocks, it is essential to consider the following:

• Penny stocks are comparable to venture capital investments. Individual stocks have the potential to generate returns that are ten times higher than those of blue chip stocks over the same time period. However, penny stocks also carry a high degree of risk, which can result in the potential loss of capital.

• Penny stocks are well-suited for short- and medium-term investment strategies. However, the long-term performance of penny stocks can be highly unpredictable. A typical strategy involves acquiring shares at their lowest point, then strategically selling after a period of growth, often influenced by news events.

• Fundamental analysis is the main tool. For example, a company is engaged in developmental activities and is poised to release results, making it a potentially lucrative investment opportunity, or it is entering new markets, has announced a merger, and has entered into a partnership with an industry giant, which also supports the decision to take a risk.

If you catch the right moment and close a penny stock trade in time, you can make more than 100% in a few months. However, this approach also carries a significant risk of financial loss, which can erase your entire investment. Penny stocks are not recommended for inexperienced traders or those seeking a more conservative investment strategy.

How to Trade Penny Stocks

For novice traders, the optimal strategy is to invest for the medium term on a buy-and-hold basis. Speculative trading is not recommended, as retail traders may be at a disadvantage when confronted with a large player manipulating the price in a low-liquidity market.

It is strongly recommended that investors avoid the OTC markets. Instead, focus on reputable companies that are listed on stock exchanges, as they tend to be more reliable. Let’s explore the advantages of such companies:

• Information about companies can be found in publicly available analytical resources. You can follow different metrics, such as price, capitalization, multipliers, financial statements, etc. However, it is often difficult to find information about companies whose shares are not traded on the stock exchange.

• The stock exchange provides a certain guarantee of a company’s reliability. Transactions are governed by clear, standardized rules.

• Reduced commission costs for investors. In contrast, OTC brokers may incur higher commissions to mitigate risk, while exchange shares are considered instruments with lower risk, resulting in reduced commissions for brokers and repositories.

The traditional approach of evaluating a company using financial metrics and statements is not as applicable in this case. A thorough analysis of the business is essential. If a company is engaged in tangible business activities, has products that are in demand, and has demonstrated year-over-year volume growth, its shares may hold promising potential. Meanwhile, diversification of investment portfolios is also a crucial aspect to consider.

Tips For Penny Stock Trading

It is important to note the peculiarities of charging commissions for transactions in penny stocks. As a rule, brokers offer the following options:

• A fixed commission per share. The amount may vary depending on the market. Brokers can charge different commissions for US and European stocks.

• A percentage of the transaction amount.

• A fixed commission per transaction, regardless of the number of shares purchased.

For example, you want to buy 1000 shares at $0.5 each, the investment amount is $500. The broker’s commission is $0.01 per share or $10.

The second option: the broker’s commission is 1% of the transaction amount. 500 * 0.01 = $5. The second option would be more favorable.

The third option: broker’s commission is fixed at $10 per transaction. If you buy only 500 shares, you will benefit from the first or second option of charging commission. If you buy more than 1000 shares, the third option is more advantageous.

Here are a few more tips:

• Check if the company is listed on the stock exchange or the national key index at least.

• Examine the share price development of the last 10 years. If there was a spike earlier, what was the reason for it, and why did the price fall? Are there any factors that could cause such a spike to happen again? If the stock is maintaining an uptrend, is there a reason for the stock price to fall?

• Take a close look at the company. What is the company’s primary focus, and what is its target audience? Read the news for the last 1-2 years. Has the company posted any positive results? Were there any lawsuits?

• Look at how the stock performed during global recessions, the mortgage crisis, and the pandemic. How much did the stock drop? How quickly did it recover? Is the company resilient?

Rather than predicting which stocks will go up, you are more likely to make money on a stock that is already experiencing an uptrend.

How to Find the Best Penny Stocks to Buy

Let’s examine an algorithm for identifying the most promising penny stocks:

1. Invest in stocks that are listed on major stock exchanges. To be listed, a company must meet the stock exchange’s requirements. This approach helps to avoid shell companies and penny stock scams designed for the pump-and-dump strategy.

2. Employ stock screeners. These tools provide a range of analytical metrics, enabling you to compare different companies.

3. Invest in stocks that have repeatedly reached new all-time highs and are currently experiencing an uptrend.

4. Focus on companies operating within potentially lucrative industries, including biotechnology, AI, blockchain, semiconductors, alternative energy, solar panels, and electric vehicles sectors.

5. Pay close attention to financial metrics. The P/E ratio should be less than 15 (for US companies), and ROE should exceed 10%. The company should have a strong balance sheet.

6. Monitor trading volume. Ideally, the trading volumes per session should be higher compared to other securities. However, it is essential to ensure that price inflation is not being manipulated.

Penny Stock Chart Patterns

The concept of trading on chart patterns is similar to the concept of trading other instruments.

A trader should be able to determine the following:

• A point where large institutional investors enter the market, propelling the price surge. This entry point should be strategically timed to coincide with fundamental factors.

• A point where large market participants exit the market, marking the conclusion of the uptrend.

Trend reversal patterns are a cornerstone of the strategy. At the same time, these patterns should be confirmed by trading volume.

Flag

A Flag is a classic trend continuation pattern. On the chart, it looks like a minor correction, after which the trend resumes.

A correction is forming within the uptrend, marked by a flagpole. It unfolds within a descending channel with parallel boundaries. The blue arrow indicates the breakout of the channel, which means the end of the correction and continuation of the uptrend. Growth of trading volume at the breakout point will confirm the signal. You can see that the fourth consecutive upward candlestick breaks through the upper boundary, confirming the strength of the trend.

Double Bottom and Double Top

The pattern emerges when one of the market forces attempts to support the trend, but the market lacks trading volume. The price encounters a support or resistance level, after which it moves in the opposite direction.

The market was in a downward trend. However, bulls tried to push the price higher, but there was not enough trading volume to reverse the downtrend. The price hit the resistance level, and a Double Top pattern formed. In this case, we can see a Triple Top pattern. The asset failed to break through the resistance level. Instead, it pierced the support level, confirming a new downtrend.

Engulfing

Am Engulfing is a reversal pattern that is formed when an opposite candlestick appears, completely engulfing the previous candlestick.

The body of the red candlestick completely overlaps the body of the previous green candlestick with its shadow. This indicates a possible downward trend. The stock has a peculiarity – orders are placed in the pre-market and post-market, so there is a gap between sessions. Therefore, it is better to look for this pattern on the hourly chart and close the trade before the end of the trading session.

Where To Trade Penny Stocks?

You can trade penny stocks on stock exchanges such as the NASDAQ, NYSE, AMEX, LSE, Euronext, etc. Alternative options include:

• Brokers giving access to OTC market instruments or to the markets themselves.

• Electronic platforms for OTC trading. For example, OTC Markets Group and OTCBB (Over-The-Counter Bulletin Board).

You can learn more about penny stocks on thematic sites:

• Analytical portals, which offer aggregated information on penny stocks in their sections.

• Websites that offer a comprehensive view of the stock market, including penny stocks. Some portals present analytical metrics for each asset.

If you have experience trading these types of assets, please share your insights in the comments below.

Conclusion

Let us draw some important conclusions about penny stocks:

• Penny stocks are shares with a price of less than $5, and their issuers are mostly micro-cap companies.

• The best penny stocks are shares of companies with a high level of capitalization of several billion USD. However, the number of these companies is relatively limited.

• The smaller the company, the less interest from large investors and the less information about it. As a result, such assets exhibit low liquidity and high volatility.

• Investing in these stocks carries a high risk. It is estimated that nine out of ten shares will depreciate within three months, while one share is projected to appreciate by 100%.

• When selecting penny stocks, it is better to consider the following criteria: firstly, the stocks should be listed on the stock exchange, as the OTC market is generally considered less stable; secondly, the business should be operating and the industry should be promising; thirdly, the stock should maintain an uptrend, although there is a risk of a bubble.

Notably, penny stocks may shoot up after hitting the bottom, but this is not guaranteed. Therefore, a more prudent strategy might be to diversify risk by allocating 70%–80% of investments to blue chips and stock indices, and 20%–30% to shares of micro-cap companies, recognizing the heightened risk involved in this approach.

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