Anyone and everyone from all corners of the world can trade from their comfort of their own as all that is needed is a computer and an internet connection.
Many people chose to trade complex asset classes like crude oil futures. But penny stock trading is preferred to many new traders because it is a lot easier to understand the stock market than the global oil market. Trading penny stocks is also cheaper to get started as some brokers have no minimum deposit requirement.
So how do you know if trading penny stocks is right for you? Here are five questions you need to ask yourself first.
1. Do You Have the Right Financial Motives?
Why exactly do you want to trade? If you want to trade to become a millionaire within a year or two despite little or no experience, trading most certainly is not right for you. Trading stocks involves risk but penny stocks could be even riskier.
Ask yourself if the money you want to risk trading penny stocks is needed for important expenses. Trading with rent money or your children’s education fund with the hopes of doubling is not the right mindset to have.
And forget about sustaining yourself with a guaranteed income at any point in your trading career. There is no magical number but you need enough money to cover at least six months’ worth of expenses while learning how to day trade.
But do you have a backup plan if your money runs out faster than expected? Can you call it quits earlier than expected and return to a regular job?
The appropriate and responsible path is to take a few months to learn how to properly and responsibly trade penny stocks. Learning the true ins and outs of penny stock trading strategies can unlock the potential for explosive returns.
2. Do You Have the Right Schedule?
Trading penny stocks for many people is a full-time job. But some people can get away with trading penny stocks as a hobby if they are available at only certain times of the day.
It is absolutely vital for penny stock traders to be alert and at their trading station at least an hour before the stock market opens. During the pre-market session, a trader is scanning the large universe of penny stocks to evaluate what stocks they will be buying and selling.
They might be looking at the news for a biotechnology company that released results from an encouraging clinical study trial. Or, they are looking for a company that announced a major contract win that would double or triple their sales.
So once 9:30 AM ET hits and the trading session official starts, a trader is well prepared.
But someone who is only available to trade penny stocks as of say 9:15 AM may not have enough time to prepare themselves for the fast action.
Similarly, traders that start their day in the afternoon session will miss out on many of the early movers and there is simply less opportunity from 12:00 PM to around 3:30 PM.
Part-time traders that start early enough can get away with ending their trading session before noon.
If you don’t have the right schedule due to work schedule, family obligations or you are in a different time zone, then penny stock trading during the off-hours might be a tedious task that offers little reward.
Source: Google Finance. (Ticker $MREO, daily chart from Dec. 18): This shows how early traders were able to capitalize on the strong gains and late traders missed out on a major surge.
3. Are You Motivated to Learn?
The day trading universe is open to anyone that wants to open an account and deposit money and no prior experience or knowledge is required.
But ask yourself first what do you really know about the stock market universe and how much are you willing to learn. Do you know how to read and understand Level 2 charts? Do you know the importance of SEC disclosures? What about evaluating what impact a poor earnings release will have on a stock’s movement.
It is OK not to know the answer to these dozens of other similar questions. But do you have the drive and dedication to learn from scratch? Do you have what it takes to read books and watch educational videos for weeks at a time? While this could be seen as an exciting process and an opportunity to learn a new skill, a lot of hard work and dedication is required to succeed.
4. Do You Know the Difference Between Trading And Gambling?
The general public shouldn’t be faulted for correlating trading penny stocks with gambling. They may have seen headlines about how the global COVID-19 pandemic prompted many bored sports bettors to find excitement and action in stocks.
But there is a fine line between trading penny stocks and gambling. Do you know the difference between the two? Gamblers will pick a penny stock — any penny stock and buy shares and simply hope for the best. They have no knowledge of what the company does, nor do they really care. They either make money on a trade or don’t.
Penny stock traders on the other hand have a strategy that has been developed, revised, and improved on over months if not years. They know how technical analysis can be used to determine an entry point, how to analyze volume trends, and where to get their news and information.
Perhaps more important, they know how vital it is to have an exit strategy as part of every trade and then to just move on.
Gamblers on the other hand love to double down when they are losing. If you are a gambler that is fine. Just be aware that the individual on the other side of your trade knows way more than you do about stocks and will be happy to take your money.
Which one are you? If you are a trader and know how to be disciplined and cautious then trading might be right for you.
Conclusion: Be Honest with Yourself
Trading penny stocks involves risk and many new traders fail. Checking off a bunch of answers from a checklist is useless and meaningless unless you are honest.
At the end of the day, only you can determine if trading penny stocks is truly the best move for you professionally. A broker certainly won’t be asking you these questions. It is not their responsibility to do so.
So be honest with yourself. If you really want to trade penny stocks but recognize now isn’t the ideal time for financial reasons or you have the wrong mindset there is nothing preventing you from giving it a shot in six months or a year.
This is a contributed article