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How to Reduce the Risk of Trading Penny Stocks

Martin Castilla            No comments            Oct, 10

You might be interested in trading penny stocks or expanding the type of stocks you trade. Well, for starters you should know what a penny stock is. A penny stock is a stock that is traded at a lower value than the average stocks. The idea is you can buy a large quantity of them, and if they offer a small positive change, you make a lot of money from your bulk number of shares.

The downside is if it has a small negative change you can lose a lot of money for the same reason. This is why there is some risk in trading penny stocks, but with this Penny Stocks 101 Guide, you can help reduce some of that and produce a windfall instead.


Before buying any stock, you should research the company, but this is especially important with penny stocks. You want to know what kind of products or services they offer and how long they have been around. Jumping into a new company, for example, can lead to big gains if they are successful but could also lead to large losses if they go bust.

Knowing the company history and their basic information is a good way to reduce risk when trading penny stocks. Plus, you’ll improve your odds of making a profit.

Specialize in a Specific Sector

Tied into the researching part you can focus on a specific sector and become an expert in that area. This is a good strategy because it is better to know a lot about a little than a little about a lot when it comes to success in penny stocks. By knowing a sector such as transportation or pharmaceuticals well you can notice trends and patterns.

This will help you to know when to buy for the best gains. Also, it will narrow down the companies you need to keep an eye on for news to come out about. To illustrate, if you are specializing in biotech companies, then you can keep an eye on if any release a new product. Then, you can stay ahead of the curve when buying these types of stocks.

Focus on Cost

It is a good idea to invest in penny stocks that trade from $1-$10 a share. This will help make sure that they are more reliable companies and not just ones that pop up for a bit before going bust. If you have a lot to invest then, a $20 stock may seem to be a penny stock to you.

Know the Rules

The last tip, to reduce risk in trading penny stocks, is knowing the rules. Some areas have laws on how much you have in your account before you can day trade. Day trading is when you buy and sell a stock in the same day.

This is very important when it comes to penny stocks because a lot of times you might need to trade during the day to make a profit. If they go up a few cents a share, then that could turn into big return depending on the number of shares you have. You don’t want to have to wait until the next day to sell them and risk them going down overnight.


So, like any stock trading, penny stocks have their risk, but using these tips you can avoid some of that risk. Just be familiar with the companies you are buying and trading laws before investing your money. Then, you can focus on positive returns.