Penny Stock Trading In 2019 – How To Trade Canadian Penny Stocks

For the most part, penny stocks have a bad reputation. It really depends on what magnitude of a security you are talking about.

Let’s just say that penny stocks pose substantially more risk, even done the correct way, than say buying value or dividend stocks.

In this article, we are going to cover:

  • What exactly a penny stock is
  • What you need to look out for to reduce your risk of getting scammed
  • And in general, how to trade or invest in Canadian penny stocks.

So What Exactly Is A Penny Stock?

This is a simple yet highly complicated question with as many answers as there are investment professionals in this world.

But let’s focus on two of the more popular definitions. First is a cookie-cutter definition that most people use – a penny stock is a stock that trades below $5 per share( I know, weird right?!)

Second, a more meaningful and informative definition – is a stock with the following characteristics:

  • It’s a stock of a small company that has highly illiquid and speculative shares.
  • Has a small following and almost never covered by analysts in the industry.
  • Usually traded over-the-counter (OTC) or through pink sheets. If you are unsure about these terms, then please take a look at our financial terms glossary.
  • They are below $5, however, this is not a hard and fast rule.

Why Should I Start Trading Canadian Penny Stocks?

Let’s face it, if you are looking to buy or start day trading penny stocks in Canada you should be comfortable with the risk and volatility involved with trading penny stocks.

You aren’t buying a blue chip stock like Royal Bank, Apple or Microsoft. Which is why buying penny stocks is not the same as buying normal stocks on the big exchanges.

These stocks usually represent small cap and specifically ‘micro-cap’ companies that operate in various niches.

Two of most important characteristics that a beginner needs to understand with Canadian penny stocks and penny stocks in general are illiquidity and speculation.

An illiquid stock is one that it is not traded often. In other words, there aren’t too many buyers and sellers.

Think of it this way, if you wanted to sell your old toaster, you won’t find many buyers. But if you tried selling a car that’s in great condition, a number of buyers would appear.

Penny stocks are highly speculative. Why is that?

Well, it’s because they are bound to experience violent movements in price, upwards or downwards. That being said, they are highly speculative anywhere you go in the world.

The reason for this is that most of the top penny stocks today represent companies that are highly leveraged, as in having lots of debt, and are on their way to bankruptcy or are just good old fashioned scams which we will cover coming up next.

In Canada, many of these companies are involved in specific sectors such as:

  • Gas
  • Mining
  • Energy
  • Technology

As a result, their prices can swing strongly and swiftly based on news or industry-specific factors. Factors such as the price of oil, incurred loss due to environmental clean-up costs, or exploration findings for a small cap mining penny stock. This is what makes trading Canadian penny stocks so dangerous.

Where there is high risk, there is always high reward

The goal at the end of the day is to make money.

Trading Canadian penny stocks is where you find the whopping 100% and 200% daily gains. There are also non-penny stock industries right now like the Canadian cannabis industry where you could find these sorts of returns, but for the most part it will be with penny stocks.

On the flip side, it is also where you find the 50% and 100% losses in value as a result of the factors above.

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