How to find penny stocks to invest and trade

Key Points

• Penny stocks are cheap to acquire but often come from underperforming companies.
• Penny stocks are for day and swing trading, not for long-term investment.
• To have success trading penny stocks, you'll need strong technical analysis and scam detection skills.

Wondering how to find penny stocks? You won't need to search too hard to find them — even broker apps like Robinhood have access to pennies nowadays. However, the real question isn't how to find penny stocks — it's how to find good penny stocks. 

Penny stocks are risky investment vehicles, and while the promise of quick exponential returns is tempting, most investors lose money when buying and selling these securities.

If you want to learn how to find penny stocks to trade, you'll first need to understand the risks and build a system for monitoring and executing your trades. Trading pennies requires a detailed understanding of technical analysis, knowledge of the market structure and a sharp eye for spotting scammers.

The importance of researching penny stocks 

Penny stocks, characterized by their low share prices and small market capitalization, present both enticing opportunities and significant risks. In this volatile and often unpredictable market, thorough research is pivotal in identifying the best penny stocks and navigating potential pitfalls. Here's why diligent research is crucial if you are going to venture into the penny stock market: 

• Risk mitigation: Research allows investors to assess the inherent risks associated with penny stocks. Understanding a company's financial health, industry position and potential red flags helps make informed decisions and mitigate risks.
• Identifying potential gems: In-depth research unveils hidden gems among penny stocks. By analyzing financial statements, market trends and growth prospects, investors can identify undervalued stocks with the potential for substantial future gains.
• Avoiding scams and manipulation: The penny stock arena is notorious for scams and market manipulation. Research enables investors to differentiate between legitimate opportunities and fraudulent schemes, protecting them from manipulative practices.
• Understanding catalysts: Successful penny stock investing often hinges on identifying catalysts that can increase stock prices. Through research, investors can stay informed about upcoming events, product launches, or industry developments that could positively impact a penny stock.
• Financial health assessment: Penny stocks are often associated with smaller, less-established companies. Researching financial health, debt levels and liquidity provides insights into a company's ability to weather market fluctuations and sustain long-term growth.
• Market sentiment analysis: Research helps investors gauge market sentiment surrounding specific penny stocks. By analyzing news, social media and market trends, investors can understand the broader market perception and make decisions accordingly.
• Long-term viability evaluation: Some penny stocks may have long-term growth potential. Thorough research allows investors to evaluate a company's business model, competitive landscape and industry dynamics, providing a foundation for decisions with a more extended time horizon.
• Strategic entry and exit points: Research assists in identifying optimal entry and exit points. Technical analysis and a deep understanding of a company's fundamentals help investors time their trades strategically and maximize returns.
• Building a diversified portfolio: Research aids in portfolio diversification, a key risk management strategy. Investors can spread risk and reduce vulnerability to sector-specific downturns by analyzing various penny stocks across different sectors.
• Staying informed amid market dynamics: Penny stocks can be highly responsive to market dynamics and external factors. Continuous research informs investors about changing market conditions, enabling them to adapt their strategies promptly.

Investors who prioritize thorough investigation significantly enhance their ability to make well-informed decisions, ultimately increasing the likelihood of success in this high-risk, high-reward investment arena.

Where to find penny stocks 

Penny stocks, characterized by low share prices and high volatility, are traded across various markets and platforms. Understanding where to find these stocks will help you when seeking opportunities in this niche. Let’s look at the key sources and markets for penny stocks:

Over-the-counter (OTC) markets

Over-the-counter (OTC) markets are a primary arena for penny stock trading. Not listed on major exchanges like the NYSE or Nasdaq, these stocks are exchanged directly between buyers and sellers. Investors should exercise caution due to potentially limited regulatory oversight, and OTC markets include tiers like OTCQB and OTCQX, which may have stricter listing requirements.

Pink sheets or OTCP

The term "pink sheets" is still commonly used to refer to stocks trading over the counter. While an outdated reference, it signifies stocks that don't meet major exchange listing standards. These days pink sheets are handled by the over-the-counter markets as OTCP stocks. OTCP stocks are considered speculative and may lack liquidity, making it imperative for investors to be aware of potential risks associated with these stocks.

Nasdaq

Nasdaq, a major U.S. stock exchange, hosts various penny stocks. Unlike those over-the-counter markets, some penny stocks are listed on NASDAQ, indicating they may have met certain listing requirements.

New York Stock Exchange (NYSE)

The NYSE is a major stock exchange where some penny stocks are listed. Penny stocks on the NYSE may have fulfilled specific listing criteria, potentially attracting more institutional and retail investors. 

Small-cap and micro-cap exchanges

Exchanges specializing in small-cap and micro-cap stocks provide platforms for penny stocks. These exchanges cater to companies with smaller market capitalizations and may have less stringent listing requirements than major exchanges. Investors can explore various exchanges designed for companies of different sizes.

Specialized stock screeners

Online platforms and stock screeners dedicated to identifying penny stocks offer valuable tools for investors. MarketBeat offers specialized screeners that allow investors to filter and identify potential penny stock opportunities based on specific criteria. These stock screeners streamline the research process and provide customizable search parameters.

Financial news and websites

Financial news sources and websites often feature trending or promising penny stock lists. Investors can stay informed about potential opportunities by regularly checking financial news and investment websites. However, caution is advised, as not all recommendations may be reliable and thorough research is essential.

Online trading platforms

Many online brokerage platforms provide access to a variety of penny stocks. Investors can use these platforms to execute trades and access research tools. Choosing a reputable broker with a user-friendly platform is crucial for a seamless trading experience. Online trading platforms offer convenience and accessibility for investors venturing into the world of penny stocks.

Stock screeners and scanners

Stock screeners are valuable tools for investors to identify potential penny stock investments. These tools help filter and sort stocks based on specific criteria, allowing traders to focus on promising options. Some of the benefits of stock screeners in the research of penny stocks include:

• Efficiency: Stock screeners can rapidly sift through many stocks to identify those that meet specific criteria. This can save traders a considerable amount of time.
• Customization: Investors can customize their search parameters to match their specific investment goals, whether that's identifying penny stocks with certain price ranges, market capitalizations, or trading volumes.
• Objective analysis: Stock screeners provide an objective and systematic approach to identifying potential penny stocks, reducing the impact of emotional biases on investment decisions.

MarketBeat provides a set of reliable stock scanner tools to assist in identifying potential penny stock opportunities. These tools can help traders quickly assess penny stocks based on various criteria. Let’s take a few minutes to focus on three key MarketBeat scanners:

Most active penny stocks:

• Purpose: The most active penny stock scanner helps you identify stocks currently experiencing high trading volumes. These stocks may be attracting traders' attention amid a significant price move.
• Effective use: Look for stocks with above-average trading volumes compared to their historical averages. Increased volume can indicate growing interest and potential price movements.
• Be cautious of stocks with exceptionally high trading volumes, which could suggest manipulation or impending sharp declines.
• Evaluate the stock's recent price trend. Focus on stocks with a consistent uptrend, making higher highs and higher lows.

Most popular penny stocks:

• Purpose: The most popular penny stock scanner helps you identify penny stocks generating substantial buzz on MarketBeat. It can indicate increased investor interest.
• Effective use: Seek out stocks marked as most popular on MarketBeat and use the “Social Media” and “Headlines” tabs located with in the stock profile to review mentions across social media and financial news websites. Higher visibility suggests heightened investor interest.
• Exercise caution when online sources heavily promote stocks, as these promotions might be part of pump-and-dump schemes.
• Investigate the stock's historical follow-through on news and announcements, as genuine interest often leads to sustained price movements.

Top penny stocks today:

• Purpose: The top penny stocks today scanner assists in identifying penny stocks with strong percentage gains during the most recent trading day. It can help pinpoint stocks in trending conditions.
• Effective use: Look for stocks that have demonstrated robust technical performance recently, such as breaking out of resistance levels or forming bullish chart patterns.
• Use technical indicators like moving averages and MACD to confirm the stock's trend. These indicators can provide additional insights into potential price directions.
• Implement stop-loss orders to safeguard your profits if the stock experiences a sudden reversal.

General tips for using MarketBeat scanners

Check out these tips before using MarketBeat scanners:

• Combine with research: While these scanners provide valuable insights, don't make investment decisions solely based on them. Combine the scanner results with your research and analysis.
• Avoid hasty decisions: Resist the temptation to buy a penny stock solely because it appears on one of these lists. Take the time to learn about the company, its financial health and business model.
• Risk awareness: Remember that penny stocks are inherently risky investments. You can potentially lose all your invested capital, so only invest funds you can afford to lose.
• Discipline and due diligence: Adhere to a disciplined trading plan and perform due diligence on every penny stock you consider. Investigate the company's financials, management and industry outlook.
• Use stop-loss orders: Consider implementing stop-loss orders to limit potential losses and protect your capital in the event of unfavorable price movements.

MarketBeat's stock scanner tools can be valuable resources for penny stock traders, providing quick insights into potential trading opportunities. However, responsible and informed investing is crucial in penny stocks. Always supplement scanner results with thorough research and adhere to risk management strategies to protect your investments.

How to use stock scanner tools effectively

Here’s how to use stock scanner tools:

• Define your criteria: Start by clearly defining the criteria you're looking for in a penny stock. This may include price range, market capitalization, average volume and technical indicators.
• Customize filters: Use the stock scanner's filters to match your criteria. Refine your search until you have a manageable list of potential stocks.
• Regular scanning: Make stock scanning a regular part of your trading routine. Markets change, and new opportunities emerge, so regular scans are essential.
• Backtesting: Back-test your strategy to see how well it would have performed. This can help refine your criteria.

Online forums and communities

Online forums and communities play a significant role in discovering penny stock recommendations, insights and news. However, navigating these spaces requires caution, etiquette and best practices:

• Lurk before you leap: Spend some time observing the community before actively participating. This will help you understand the culture and dynamics of the forum.
• Contribute thoughtfully: When you participate, offer valuable insights, ask questions and engage respectfully. Avoid spamming or promoting stocks excessively.
• Verify information: Always verify the information you find in online communities. Do your due diligence before acting on any stock recommendations.
• Beware of hype: Forums can sometimes be a breeding ground for hype and pump-and-dump schemes. Be skeptical of overly enthusiastic claims and conduct independent research.

Researching penny stock companies 

When researching penny stock companies, consider these key factors:

• Financial health: Assess the company's financial statements, looking for signs of profitability, debt levels and cash flow.
• Management team: Evaluate the qualifications and track record of the company's management team.
• Industry and market: Understand the industry in which the company operates and its growth potential.
• Regulatory compliance: Check if the company complies with regulatory requirements, especially if it's listed on OTC markets.
• News and press releases: Keep an eye on recent news and press releases that may impact the company's prospects.
• Competitive analysis: Analyze the company's competitors and its position within the industry.
• Historical performance: Review historical stock performance, looking for patterns and trends.

Due diligence checklist

A crucial aspect of deciding which penny stock is best for you is conducting due diligence, which involves thorough research and analysis of potential investments, including:

• Review financial statements and SEC filings
• Investigate the company's products or services
• Check for any pending legal issues or lawsuits
• Research the company's competitors
• Understand the company's business model and revenue sources
• Consider the company's growth potential and market demand for its products or services
• Review any earnings call transcripts available to understand the company’s direction better

Penny stock trading has opportunities and pitfalls. Utilizing stock screeners, engaging with online communities and conducting thorough research can help you navigate the risks and increase your chances of making informed penny stock investments. However, always approach penny stocks cautiously and only invest what you can afford to lose.

Diversifying your penny stock portfolio

Diversification is a fundamental strategy for managing risk in any investment portfolio, and it holds particular importance when dealing with penny stocks. These microcap stocks' inherent volatility and unpredictability make diversification crucial for mitigating potential losses and maximizing opportunities. 

Why diversify penny stock investments? Check out a few reasons:

• Risk deduction: The primary purpose of diversification is to spread risk across different assets. By holding a variety of penny stocks in your portfolio, you reduce the impact of a poor-performing stock on your overall investment.
• Opportunity for gains: Diversification doesn't just reduce risk; it also provides the potential for gains. While some penny stocks may underperform, others may surge, contributing to portfolio growth.
• Increased stability: A well-diversified portfolio is typically more stable and less susceptible to extreme fluctuations. It can help you weather market turbulence with more resilience.
• Exposure to different sectors: Diversification allows you to explore various sectors and industries, which can help you capitalize on emerging trends or opportunities in different market areas.

To create a well-balanced penny stock portfolio: 

• Set allocation limits: Before investing in penny stocks, determine how much of your overall portfolio you will allocate to this high-risk asset class. Setting limits ensures you don't overexpose yourself to penny stock volatility.
• Select stocks from different sectors: Avoid concentrating your investments in a single sector or industry. Choose penny stocks from various sectors to reduce vulnerability to sector-specific risks.
• Vary market capitalization: While penny stocks have small market capitalizations, you can still diversify within this category. Consider mixing microcap, small-cap and nano-cap stocks to spread risk.
• Balance risk profiles: Not all penny stocks are created equal in risk. Some may be less volatile and more stable than others. Aim for a balance of higher-risk and lower-risk penny stocks in your portfolio.
• Consider non-penny stock assets: To further enhance diversification, consider incorporating other asset classes, such as large-cap stocks, bonds or alternative investments. These assets can provide stability and counterbalance penny stock risk.
• Regularly review and rebalance: Diversification is not a one-time task. It requires ongoing management. Regularly review your portfolio and rebalance it to maintain your desired asset allocation.
• Monitor market trends: Stay informed about broader market trends and economic developments. This can help you adjust your portfolio to align with evolving market conditions.
• Risk-adjusted position sizing: Adjust the size of your positions based on the risk associated with each penny stock. Allocate more capital to lower-risk stocks and limit your exposure to higher-risk picks.

By spreading your investments across various stocks, sectors and risk profiles, you can reduce the impact of individual stock fluctuations and create a more resilient and well-balanced portfolio. 

Track your investments

Effectively tracking your penny stock investments is essential for informed decision-making and portfolio performance management. In the volatile realm of penny stocks, staying vigilant and adaptable is crucial. Here are some tips on how to monitor and assess the performance of your chosen penny stocks and strategies for adjusting your picks based on market conditions:

Tips for monitoring penny stock performance: 

• Regular check-ins: Consistently review your penny stock portfolio. Set a schedule for periodic check-ins to stay informed about each stock's performance.
• Use watchlists: Many trading platforms offer watchlists where you can add your penny stocks. These watchlists provide real-time updates on stock prices and changes.
• Track key metrics: Pay attention to essential metrics such as stock price, volume, market capitalization and news relevant to your holdings.
• Utilize stock alerts: Set up price alerts for each penny stock in your portfolio. These alerts will notify you when a stock reaches a specific price, helping you make timely decisions.
• Keep records: Maintain detailed records of your trades and investment rationale. This record-keeping can help you track the performance of your trades and make adjustments as needed.
• Stay informed: Keep an eye on market news, financial reports and any developments related to the industries or sectors in which your penny stocks operate.
• Review trading plans: Revisit your initial trading plan for each penny stock. Confirm whether the stock aligns with your original investment thesis or if adjustments are required.

Tracking and assessing the performance of your chosen penny stocks is essential for success in this high-risk investment arena. Stay well-informed, remain adaptable to changing market conditions and be prepared to adjust your investment strategies as needed. Combining vigilant monitoring with disciplined decision-making can help you navigate the complex and volatile world of penny stocks more effectively.

How to avoid penny stock scams

Staying away from scams is the primary objective when trading these stocks. Penny stock scams come in different shrouds, usually involving misinformation. It could be a penny stock promoter orchestrating a pump-and-dump scheme by pretending to have inside info on a product agreement or a microcap company misleading investors about their debt levels. Many people with questionable motives hang around this neck of the woods, so you must learn how to spot scams and fraud.

Set a couple of hard and fast rules to avoid penny stock scams. First, never trust anyone with tips that sound too good to be true, whether it's the promise of inside information or the expectation of outlandish returns. Be wary of promoters selling courses or programs about trading penny stocks. And try to avoid companies that aren't required to report data to regulators (looking at you, pink sheets).

Prepare for the good and bad with penny stocks

Penny stock trading isn't for everyone. The risk is high, volatility is wild, and the market participants often don't have your best interests at heart. If you want success trading penny stocks, you must embrace risk and volatility. Penny stock traders can earn high rewards but are often on the wrong end of some wicked losses. So, only invest what you can afford to lose, plan your exit strategy, and always keep your eyes open for scammers.