Step by Step Penny Stock Guide

Let's start from scratch. You have either:

  • never traded a stock in your life, OR...
  • been getting killed on penny stocks and can't understand why

Here's an official step by step guide to invest just like I do. I promise it will massively improve your trading results (whether penny stocks or big blue chip companies). See how many steps you can get through before you start turning losses into profits.

1. Does penny stock investing make sense for you?

I'll start with the easy stuff.

95% of penny stocks are awful companies or poor investment choices. (And this is coming from a guy who wrote, Penny Stocks for Dummies," owns the world-famous Peter Leeds Stock Picks alert service, and has made a living trading low-priced shares.)

ACTION STEP: This quick Info Graphic will help you decide if you should even proceed. Review the entire thing.

It's OK if penny stocks aren't appropriate for you, just forget about them and don't ever look back! Seriously.

2. Mandatory For Every Penny Stock Investor

OK, you're still here. I am assuming you are willing to put a few minutes into doing things right. If I'm correct about your commitment, then you will make money from penny stocks for the rest of your life.

On the other hand, if you just want a quick hit that turns your $132.44 into a million bucks overnight, then you have already lost - you are in the wrong place. (And I bet that that you are male, want a fancy car, and are between the ages of 18 and 33 - just a guess).

ACTION STEP: Watch the Penny Stock Protections - pay honest attention to them, even though you may already know some of the concepts.

(I just watched it again in high definition - man, I should really shave better!)

3. For the Serious People

This step is for people who are serious about becoming great penny stock traders. It is also the longest step, but the most important one. We get into the good stuff right after!

ACTION STEP: Read Penny Stocks for Dummies. Disclosure: Yes, I wrote it. And if you buy it I get a small royalty.

Relax, borrow it from a friend, or get it from the library.

Or even buy it (anywhere books are sold), and ask for the royalty to be returned to you. I will have Tammy or Lisa send you the dollar. I honestly will.

Even if I make zero, read the book. It would have changed my life, when I started investing at 14 years old and lost 100% of my money within 2 weeks.

The book costs about $25. Pay special attention to these sections:

  • Avoiding promotions, scams, and bribes
  • 10 rapid result tactics
  • 10 trading truths
  • Picking a winner
  • Limiting losses
  • Fundamental, technical, and third level(tm) analysis
4. Start Trading

Here's where you get started "trading" penny stocks. But, we're going to get into it with ZERO risk, and absolutely no money. If you followed the step above, you already know exactly how.

For the rest of you slackers, it's called "Paper Trading." Don't worry, it's not a book, it's an infographic.

ACTION STEP: Here's how to Paper Trade.

Anyway, paper trade until you can demonstrate that you would be making money. If you are so good (and impatient) that you can't wait to get started with real money, just pause for a minute. You'd be able to prove how good you are, risk free, and by the time you actually trade, you'll be even better (and just as impatient), I promise.

5. Set goals

Here's the step where I might sound like your grade 7 teacher. But, it's an important step to gauge progress and set a benchmark for where you are at. It will allow you to know how good your trading approach is becoming.

"If you don't know where you are going, any road will take you there."
- Lewis Carroll

ACTION STEP: Answer these questions:

  • how much money do you have to invest in risky penny stocks?
  • how much do you want that to become?
  • how quickly?
  • how often do you think a penny stock trade will lose you money?
  • how much would you lose on the bad trades?
  • how much do you anticipate making on good trades?
  • are your answers realistic?

Here's what realistic answers look like (as an example). Compare them to your own.

  • $1,000
  • $4,000
  • $3 Years
  • 50% of the time
  • 10%
  • 50%
  • Yes, and they are very conservative

If you've been following the steps up to this point, you may do much better than my own conservative answers. But I'm just trying to lower your expectations, so it's easier to exceed them.

6. Pick a Loser (That's Right)

We're almost to the point where you actually buy your first penny stock. First, try to pick 2 where you lose money. You read that right. Pick 2 penny stocks where your investment is going to go downhill.

Picking a winner is the same process as picking a loser. By selecting penny stocks that will decrease in price, you actually put so much of what you've learned in the earlier steps to the test.

You do not want to be the joker who wins big the very first time they enter the casino. People like that ALWAYS lose long term, and ALWAYS expect to win. They never learn how seriously to take things, or how hard it can truly become. They never even recognize how unbelievably lucky they were the first time.

You can actually talk to one of these guys about their experience - they are drunk in the Las Vegas alley beside Caesar's Palace.

You want to be more like me when I started - losing it all immediately. I responded by "Paper Trading" like crazy, and reading every investment book I could get my hands on. I took the best parts of each approach, and ignored what I felt wouldn't work. This gave birth to Leeds Analysis, and eventually I was kicking a little bit of butt in speculative shares.

You have the luxury of skipping that massively educational, yet time-devouring stage, because you have found me, and gotten to this step.

ACTION STEP: Once you find the 2 penny stocks that are going to drop in value, watch them until they do indeed fall at least 10%. (Don't actually buy them!)

If they don't act as you expected, look for others. Take as long as is required to do this step, whether weeks or months.

Once you've found 2 penny stocks that fell more than 10% in value, move on to the next step. Do not proceed until you have been successful at this stage. I'm serious.

7. Decide on Sources of Investment Picks

This step may make all the difference in the world. There are many places to generate ideas for potential investments, and you need to decide which ones to trust.

The general rules are:

  • If their picks are making you money, stick with them
  • If their calls and expectations are correct, stick with them
  • If they are wrong, poor, or broke, stop listening to them
  • If they do not have a 100% Unbiased Guarantee, stop trusting them

ACTION STEP: Try different sources (major media, trade publications, professional analysts). Discard those that aren't working for you, double down on watching those that are panning out well.

Remember, follow but never believe the mass media. Watch them to get a pulse on the market, but don't expect what they tell you is accurate or will ever come true.

For example, CNBC is just telling you what has already happened, and what the mob is doing now, but presents it like current news. CNN makes money by scaring you - but if they are telling you that terrorists are going to take down every plane in the sky, you know air travel is safer than ever. If they are talking about an Ebola pandemic, it means the outbreak is finally getting under control (while I've been talking about it for years before CNN ever mentioned it)!

Typically, the investor sentiment they are telling you will be useful when considered as a contrarian indicator. More about sentiment near the end of this video (optional).

8. Get a Discount Stock Broker

If you already have a stock broker, skip ahead a step. If you do not, you will need to open an account with a discount broker, and deposit the funds with them which you wish to trade. It is a very easy process.

The best brokers for penny stock traders can be viewed on our Official Discount Broker Review. That's an infographic, but you can also see our findings in this blog.

You need to choose which broker you like best, since it depends what is important to you specifically. No account minimums, friendly service, low costs per trade?

Any broker is going to take a very small fee every time you buy or sell a stock. The commission charges are typically between $7 and $19.

9. Decide on Specific Industries

You should narrow your focus to industry groups which interest you. If you like technology, or if you understand biotech, you will have an advantage over many other traders in the space.

ACTION STEP: Choose at least 4 industries upon which you want to focus, and no more than 7.

Industry groups include:

  • energy
  • precious metals
  • base metals
  • materials
  • industrials
  • consumer discretionary
  • consumer staples
  • health care
  • financials
  • information technology
  • telecom
  • utilities

You can even get more granular - for example, focusing on offshore oil production companies, rather than just the overall energy industry. Greater focus will improve your trading results, and allow for faster growth in specialized knowledge.

10. Select Specific Companies Within the Chosen Industry Groups

Look at all the stocks in the industry space(s) which interest you. You should look into a company's most direct competitors, which typically can be done on most major financial web sites.

Choose the penny stocks which pass the tests you learned in Penny Stocks for Dummies, and would likely pass Leeds Analysis.

ACTION STEP: Build a watch list of at least 10, but preferably 20 or more stocks. Watch them all for at least a week, paying attention to each stock's trading volume, company news, and operational momentum. Are they getting new contracts? Did they lose a big client? Are their competitors launching new products or advertising pricing discounts?

Do NOT read about them on message boards. In fact, NEVER go on stock market message boards ever, unless you want to get manipulated with lies, and directed by morons.

However, DO go on the company's web site, read their financial results, and any corporate "Management Discussion and Analysis (MD&A)" reports. The MD&A part is mandatory. Most of this should be accessible via the Investor Relations portion of the web site.

Also, take a look at their recent annual and quarterly financial results, available via most free stock market portals. (Yahoo Finance, MarketWatch, The Street, etc...)

11. Increase Your Focus Even More

By this point, you should be able to cut your short list down by a few names. For example, maybe your original 20 stock short list becomes 7, after looking deeper into some of these companies. Get rid of any that give you any feelings of concern, or which you believe will not help you attain your goals.

If you properly followed the steps up until this point, you should be an expert on that small handful of companies. You know what they are hoping to do, what type of press release will lift the shares, how strong their financial position is now (and will be in twelve months)...

12. Call the Investor Relations of Each Company

Before you make ANY trade, go to the company's web site. Find the section on Investor Relations (IR). Locate the IR contact, and phone them. Do not e-mail, you should phone them. If you honestly are going to e-mail instead of phone, then there is no value to this step here for you - you should return back to Step 1.

You may have to call back if you don't hear from them in a day or two, so you call back. They legally must provide you with communication.

ACTION STEP: Tell the IR contact that you are interested in investing in the stock. Ask them a few questions as needed (below), but let them talk. You listen.

If you feel like you need to do it, tell them financial analyst Peter Leeds asked you to call for some answers. (Sometimes a quick name drop helps nervous investors feel more confident... for whatever reason which I do not understand).

Some great questions to ask (but go by any script you want):

"Oh, great and powerful Investor Relations person... Tell me about your company:"

  • who are your most significant competitors?
  • how would your competitors describe your product or service?
  • what is your company's competitive advantage?
  • what do you expect for the overall industry in the coming years?
  • what is your market share, and how will you increase it?
  • what do you expect from headcount (total employees) this year? In 3 - 5 years?
  • what's the plan to increase revenues?
  • what's the plan to increase earnings?

This will give you even more clarity about which are the great companies to invest in, and which are not.

Remember, the number of potential investments is unlimited. On the other hand, the number of high-quality penny stocks that are set to soar is VERY limited. Be incredibly demanding, just as I tell you in this video.

13. Your First Trade

Enter a trade order with your broker to buy small amount of the stock you like. If you want to invest $2,000, then only use $1,000. A week from now, if you still like the trade, you can consider scaling in with the rest of your intended cash.

Use limit orders rather than market orders, which is especially important with tiny, thinly-traded penny stocks.

Establish mental stop losses. Honestly, stick with your mental stop loss level, because that's THE SINGLE MOST IMPORTANT TRADING TACTIC you will ever learn. It is also the most valuable concept you will learn in this Official Step by Step Guide to Penny Stock Investing. You must not blow all your cash on a single bad call... because you will have bad calls.

14. Watch and Wait

Keep an eye on your investment. (If you are like 99% of investors, you'll be checking the share price 17 times a day for the next 12 months!) I was no different.

If you don't feel impatient or bored at any point during Step 14, then you aren't doing it right.

Now let's move on to the FINAL STEP!

15. Gauge Your Outcome

At this point, you should have either seen some losses, gains, or shares which didn't really do much at all. Congratulations on getting through all the stages. Here's what to do now, which is basically a debriefing and results review.

Loss: If you made a bad call, the shares will have fallen. You should have sold when the shares hit your stop loss price. You took a loss. Go back to Step 10.

Flat: With penny stocks, the shares might have not moved at all in any direction. Review your pick each week, and ask if you would still invest in it today. Remember, you bought shares of a business, so let the company have time to play out their operational plan. Of course, if you decide you've made a mistake, you may want to sell - take it off like a Band Aid in one motion, and go back to Step 10.

Gain: Congratulations! Maybe you know what you're doing now, keep it up! (Unless that was your very first trade, in which case you should go sit in the Las Vegas alley beside Caesar's Palace. That's where you will live now.)

Get our best penny stocks
  • don't have the time?
  • can't do all the work required?
  • want selections from the authority?

For about 50 cents a day, we give your our best high-quality, low-priced stock picks. Along with a full team, Peter Leeds is the widely-recognized authority on penny stocks. Start making money from penny stocks right away.