Day trading stocks, options, currency or any other investment requires the trader to make transactions on the same stock throughout the day. Is it safe for investors to employ this strategy with penny stocks?
What is a Penny Stock?
The term “penny stock” has a variety of definitions. Here are some:
1. Stocks trading under $1.00
2. Stocks trading under $5.00
3. Micro-cap stocks
4. Any stock not trading on a major exchange
Day trading certain types of penny stocks are safer than others.
Dangers of Day Trading Illiquid Penny Stocks
Day traders usually gravitate toward extremely liquid stocks. A public company with many shares being traded will give a tighter bid and ask spread. If the day trader buys at market value, a closer bid and ask value will save him money. Exiting a trade is also made more profitable and easy to accomplish if the daily turnover is high.
Illiquid stocks with few shares being traded might earn some traders a high reward as they add liquidity by selling at the ask and buying at the bid. Still, trading a stock online with little investor interest opens the way for volatile price moves and difficulty in exiting a position.
Depending on the definition there are many liquid penny stocks. Google Finance lists 26 different penny stocks priced under $1 that have an average volume of more than 1 million shares per day (as of August 13th 2010).
Micro Cap Stocks and Volatile Trading
Stocks that have a very small market capitalization (share price x share float) often have higher volatility than extremely large cap stocks. Day trading micro cap companies requires lightning quick reflexes to react to rapid price changes. High volume rebate trading might be more difficult with this type of stock, but not impossible.
Momentum trading that follows online news items, or swing trading tips adapted to day trading, could be used with this type of volatile stock. Finding micro cap stocks on the larger exchanges will reduce some of the associated risk for inexperienced traders. Creating a customized penny stock watch list is discussed in the linked article here. For Canadian penny stocks the scanning criteria is found here.
Day Trading Stocks Not Listed on Major Exchanges
Over The Counter Bulletin Board (OTCBB) stocks or Pink Sheets are two types of online exchanges off the main market path. The standards to be listed on these exchanges are far lower than the major markets such as the NYSE, NASDAQ, or the AMEX.
On the OTCBB exchange, traders will find the majority of penny stocks available. These low priced shares should be traded with caution. Why?
* Pink Sheets and OTCBB are often targeted for pump and dump operations
* Illiquid share trading
* Highly suspect market manipulation
* Common targets of forums and message boards with ‘hot tips’
These topics have been covered exhaustively by the Securities Exchange Commission (SEC), and also by May 2nd, 2005 USA Today article by Matt Krantz. Pink Sheets are not regulated by the SEC and not acknowledged as an exchange. With good reason, day traders should be judicious when trading in these circles.
Online Penny Stock Trading Techniques and Tips
Highly liquid stocks priced under $5.00 (or even $1.00) can be found on big exchanges. These stocks can be day traded like any other stock. Note that rebate trading commissions alter for most stocks under $1.00.
Some popular tips and methods for online day trading in Canada are written about here, but they can be applied in any country or market. Intra-day trading strategies include:
* Rebate Trading
* Arbitrage Strategies
* Time and Sales Tape Reading
* Momentum Techniques
* Pivot Points
If discernment and due diligence are top ranking qualities in an individual, then day trading penny stocks online with the aforementioned tips and strategies could help the investor to be highly successful.
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