Trading penny stocks

A large number of well-established companies were once trading for less than $5 a share, including Ford, JD Sports and Monster Beverage. Those who invested in these companies during their penny stock days could have made a substantial gain over time. Read ahead for everything you need to know about penny stocks, and how-to identify good penny share opportunities.

What are penny stocks?

Penny stocks or penny shares are a common stock that trade for less than £1 on UK stock exchanges or less than $5 on US stock exchanges. The low share price means the stock is likely to be a highly speculative investment.

Although the original definition of a penny stock is a stock that is valued under £1 or $5 in the UK and US respectively, they have been expanded to cover stocks valued over these guideline prices. In Australia, these companies are also called "small-cap stock" and are more generally defined as a company with a market cap of less than AUD 50 million. But generally, penny stocks have low share prices. They are usually characterised by very high volatility and are seen as higher-risk stocks, with the possibility of significant growth.

The appeal of penny stocks and penny shares is easy to see. If you have $1,000 to invest, you can get a considerably larger share percentage in a smaller company whose shares are trading for a few cents, rather than buying blue-chip shares which may cost much more for an extremely small percentage of ownership. And of course, if your penny share one day goes on to join the blue-chips, you could end up making large returns with the right trading strategy.

How to trade penny stocks in Australia

1. Open a live CFD trading account. With CMC Markets you can open a live account to trade the price movements of penny stocks.

2. Research to find the right stocks for you. Use our news and insight tools and review our market news and analysis sections to inform your penny-stock trading efforts.

3. Decide if you want to buy or sell. Determine your entry and exit points based on your trading strategy. Go long and ‘buy’ if you think the instrument price will rise, or go short and ‘sell’ if you think the price will fall. 

4. Manage your risk. Before placing your trade, make sure you have followed risk-management guidelines as part of your strategy.

5. Determine your position size and place the trade. Apply any risk-management orders, such as stop-loss and take-profit, and confirm your trade.

6. Monitor your position and close your trade. If you’re making a profit on your penny stock position, stick to your trading plan and close out when the target price is reached. 

Penny stock market analysis

Penny stock markets are well known for being extremely volatile, and price fluctuations of around 20% are very common. Therefore, it is essential to conduct a thorough analysis while following your risk-management strategy before deciding whether or not to go forward with  any trading decision. It is also best practice to trade in industries where there is large market growth as opposed to industries that are declining.

Penny stocks tend to not see much daily trading volume on the stock markets, therefore it often doesn't take a large buy or sell order to move the price. If plenty of people are talking about a penny share, on internet forums for example, that could also influence the price. It is important not to get sucked into an investment just because it has had a large one-day move and you’re afraid of missing out. What goes up quickly can come down even quicker – so make sure your reasons for investing are the right ones.

Penny stock cost management

If you’re happy with your research and have made your trade, another key point is: don’t forget to sell. For example, let's say you are fortunate and the value of the penny stock moves in your favour and, for the sake of argument, it doubles. It can be very easy to sit back and wait for it to double once more. This is not always going to happen, and you should have a strategy in place for when it doesn’t.

When sentiment changes on smaller shares its price can about-turn very quickly, taking all of your hard-won profit, and maybe more. Getting in to the position is only half the plan of trading, in fact some would say it actually accounts for less than that. Where you get out will determine just how successful penny stock trading could be for you.

The best penny stocks to trade

We offer trading opportunities on thousands of your favourite global stocks, some of which are penny stocks. Penny stocks are often small or start-up companies chasing growth opportunities, though you may also sometimes find some big brand names that have experienced steep downtrends in their market value that could have undervalued stock prices. 

Many well-known brands once traded at penny stock levels, including Monster Beverage (NASDAQ: MNST), Ford (NYSE: F) and SiriusXM (NASDAQ: SIRI).

Where to trade penny stocks?

With CFD trading, you can trade your favourite financial instruments from around the world on one streamlined platform. This includes thousands of shares.

Penny stock trading platform

Whether you’re an experienced trader or new to the market, our Next Generation trading platform can be personalised for your individual trading needs. Our innovative platform combines cutting-edge trading tools with a straightforward interface.

Penny stock mobile trading app

Our award-winning CFD mobile trading app enables you to trade on the go, wherever and whenever you want. Available for iPhone, iPad and Android, our trading mobile apps include full order-ticket functionality and advanced charting, specifically designed for mobiles.