Seeing that someone who is new to stock trading may only have a few hundred dollars to risk, then it is crucial for new traders to be cautious, conduct some sort of risk assessment, keep the brokerage fees low, and avoid being labeled a Pattern Day Trader (PDT) so that profits are maximized as much as possible while growing a small account.
Here’s one observation when trading penny stocks for newbie beginners who may be starting out with a few hundred dollars. The trick is to get as many shares as possible so that any change in price gives you the best bang for the …penny. For example: If you have 100 shares of Pennystock A, and it moves up by a penny, your profit is 100 pennies… aka $1.00.
If you have 1000 shares of penny stock B, and it moves up a penny, your profit is 1000 pennies… aka $10 bucks.
If you have 10,000 shares of Pennystock C, and it moves up by one penny, your profit is 10,000 pennies… aka $100 bucks.
Therefore, the more shares you have, the smaller the move has to be in order to obtain a decent profit. So, when you’re starting out with a small account, your goal should be to obtain as many shares as possible so that even smaller moves will provide for a nice little profit for the day… or the next day.
And, what do I mean by that? Well, one of our goals, in the beginning, is to avoid being labeled a PDT. Why is that so bad? Well, because the brokerage can limit your activities even further, and we do not wish to be limited further… Newbie traders have enough limitations to cope with. So, let’s just avoid the PDT designation, shall we? So, in order to avoid being labeled a PDT, holding a new position overnight avoids the PDT rule altogether. But, no worries, once you grow your small account to over 25K, that will release an ETrade account holder from the PDT rule. I’m not sure if it’s 25K across the board and the same amount in all brokerages, but, you get the idea. This designation does exist, and you should probably avoid it if you wish to learn how to trade penny stocks on a day to day basis.
Ok, so let’s just say, you’ve just opened up your first brokerage account. You have $500 to risk. You focus on stocks that are below $1.00 per share. You find penny stock D. It has a catalyst that should reflect good news to the majority of the people who make up the collective “market.” Since your brokerage account is below $2k, you may need to remember to deduct the brokerage commission fees in your calculations. Say, you purchase penny stock E at .43/share. Depending on your fee, you should have approximately 1150 shares. Again, seeing that your small account is not over $25K, you have to remember the PDT rules. Since you wish to avoid PDT, and you’re following the overnight strategy, you hold overnight. All you need is one penny… and you wait until the next day.
The next day, you see that the stock is trading pre-market, and it’s up by $.05. That’s good! Once the market opens, and more volume comes in, all you have to do now is keep your emotions in check, learn how to control greed… which is sometimes hard to do, and take your profits. A $.05 profit per share would be approximately $57.50 while a $.10 profit per share would be approximately $115.00 in profits. You decide to realize your profits by selling your position. Congratulations, you just grew your account. Now, do it again.
If using the overnight strategy, and you’re avoiding the PDT rule, you “could” do this every trading day of the week. Further, let’s say that your successful more than half the time while keeping a lid on any losses you may incur, this is how you grow a small account. Your goal is to have more wins than losses and protect your money as much as possible.
So, using the $.05-$.07 profit per share example, let’s say you begin to profit consistently by $60 three times a week for say, 12 weeks or three months. By the end of the third month, your account should be approximately $2,500 to $2,600 depending on fees. But wait, there’s more!
In this example, the $60 profit is static – meaning it doesn’t change. In real life, it’s a bit different simply because of the cumulative effect as your account grows. As it grows, and you remain focused on stocks below $1.00 per share, you can buy more shares. It’s as simple as that. So, for instance, your initial profits by the week may begin at $180.00, but by the end of the three months, your profits have grown to – say – $250 per week, assuming, of course, that you keep rolling your profits into buying more shares each time you open a position.
And, going by the examples at the beginning of this post, once you can purchase 10,000 shares of some penny-stock C, above, and it moves up only by one penny, now you’re profiting by $100 per trading day, and that’s the “trick” of penny stock trading.
So, if you’re a complete newbie, and you are nervous about starting “somewhere,” these are some examples of how to start with a small account, avoid a major pitfall, and grow your account into something more substantial.
If you are a newbie and are considering penny stock trading, there is much work to be done. There are many strategies you can follow, and you, along with myself, have much to learn in the way of charting, trend lines, moving averages, risk management and more. These topics will be discussed in future posts, but for now, I wish you well in your journey into penny stocks.
To Your Success!
~MMH
Disclaimer: Please remember that this post is provided for educational discussion only. The author is not a professional stockbroker, trader, or financial planner. This post was not written to persuade anyone to trade any stock, commodity, future, or anything of any value that may be traded on any exchange. It is simply an educational discussion in an area of interest. By reading and using this blog, each user understands this disclaimer and holds the owner/author harmless.
