How to Become A Millionaire Buying Penny Stocks

Young man watching online stock prices.
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Penny stocks are risky, low-priced and thinly traded issues that do not qualify for listing on major exchanges. Although online brokers have given potential investors easy access to the penny-stock market, financial manipulators also use Internet sites, message boards, and e-mail newsletters and alerts to manipulate information and the apparent prospects of small and startup companies. The result is a financial market rife with danger, but also one that may offer profit opportunities and even a chance to make millions for those who tread with care, diligence and self-awareness.

Information Is Profit

Seek out reputable information sources on the penny stock market and research these sources thoroughly. You want to know ahead of time whom you're listening to and what kind of track record they have. Note that supposedly "unbiased" reviews of Internet sites and newsletters can also be fraudulent. Not only do penny-stock companies pay for positive coverage by analysts, penny-stock promoters often pay for good reviews by their own customers or deceive you by using aliases and false screen names.

Trading Caveats

Open a trading account and fund it with money that you can afford to lose. Your objective, of course, is to uncover penny stocks that are going to rise in price. This never happens randomly. If a company's products are promising, or the company is entering a new market or is about to land a major contract, you may have found a potential winner. But public information on a company is just that: public. In theory, it's known to everyone who's paying attention, and that means the information is already priced into the stock.

Getting In

Scope out penny stocks that are getting initial coverage in the information sources you're using. You're looking for "alerts" on stocks that are about to get pumped by brokers and/or financial advisers. When they target a stock, their goal is to inspire a buying wave among ordinary traders (like you). They do this by enthusing about a company's breakthrough, revolutionary product -- whether it's an amazing new health supplement, magically useful software or a high-tech mousetrap. Get the stock symbol, then check the stock's recent price chart through your brokerage account. If the stock starts to rise, climb aboard. Be aware that promoters usually buy the stock well before they send out an alert -- they're hunting for a quick payout, and you're the target.

Edge-of-Your-Seat Trading

Put a stop-loss limit on your stock once you're holding it. This prevents a total loss of your stake when (not if) the stock drops. Watch the stock carefully; successful penny-stock traders always stay at their screens, attentively watching the ticks (changes in price). When it's being promoted, a penny stock typically rises sharply through several days of trading, then levels off. When the price climb stops accelerating, sell the stock. Also sell the stock if it does nothing; never buy and hold in this market. Your goal is to anticipate the dumping that will occur when the promoters of the stock decide to take their profits.