Investing in penny stocks is hard. And, making a profit with penny stocks is even harder. But, for those who are determined and willing to put in the work, it can be very worth it. Now, there are a few things that all those who want to invest in penny stocks need to know. And we'll get into that in great detail. However, right now, investors need to understand the current trends at play.

First, we have the effect of social media on the entire stock market. With Robinhood and Reddit working in tandem to support retail investors, finding and buying penny stocks has never been easier.

However, finding penny stocks on Reddit and Robinhood can come with both ups and downs. On one hand, these cheap stocks tend to be highly volatile. This is due to both the nature of stocks under $5 and the intense speculation that is a result of mass investing. But, using social media to find penny stocks for your watchlist , can be a great tool as long as you follow the next step.

[Read More] 5 Robinhood Penny Stocks That You Should Know About in May

The next step is research. We cannot stress this enough. Research will always be the core difference between a profitable and unprofitable portfolio. This is something that all pro traders will tell you is arguably, one of the most important steps. So, with these two things in mind before we go any further, learning how to invest in penny stocks can be an enjoyable experience. And so if you're debating it, here are three things you need to consider.

3 Things to Know When Investing in Penny Stocks

1. Getting a Trading Education
2. Understanding Volatility as an Advantage
3. Creating a Penny Stock Watchlist

1. Getting a Trading Education

One of the most valuable things any trader can do is educate themselves on how to trade penny stocks . This ties into the research stage, however, there are some nuances. For one, a trading education takes time.

Yes, it includes understanding the basics, but there are more advanced factors to consider. This could be anything from trading patterns and knowing how to enter and exit a position, as well as others. In line with this, traders need to know what type of trader they are.

For example, if you only intend to buy and hold long-term positions in penny stocks, looking at daily technical indicators may not be too necessary. However, if you wish to swing trade or buy and sell penny stock in a short time frame, using these indicators will be crucial to trading. Either way, understanding what makes the market and specific penny stocks go up and down is extremely important.

And, there are plenty of online resources that allow you to get a trading education. But, beware that this is not a five-minute process. Learning the ins and outs of buying penny stocks takes time and dedication. You wouldn't trust a surgeon who learned how to perform surgery in a few days? So why would you trade with a lack of knowledge on what to look for?

2. Understanding Volatility as an Advantage

Volatility is one of the main benefits that penny stocks can offer. Because stocks under $5 move up and down so frequently, many traders use these securities as a way to secure short-term gains. However, on the other hand, volatility can be a major downside for those who don't know how to use it. When first trading penny stocks , it can be easy to watch your portfolio go from green to red very quickly.

[Read More] 3 Penny Stocks To Watch Before Friday If You Like Volatility

Most new traders tend to lean toward the largest movers of the day or popular penny stocks on Reddit or other social media sites. However, this puts you at a major disadvantage to traders that know how to use volatility and what to look for.

So, what do you need to look for when using volatility as an advantage? Well, the number one aspect to consider is speculation. Speculation is a rather all-encompassing term that describes any external factor affecting a penny stock. This could be news, press releases, balance sheets, industry-wide announcements, or anything similar.

While we like to think that penny stocks trade-off of fundamentals alone, in reality, speculation accounts for the majority of moves that a penny stock will make. Because of this, having access to real-time news software will always be your best friend. In addition, investors can look at the industry a penny stock is in, and see what that specific market is doing in the present and the future. This is the best way to avoid unexpected moves in your portfolio.

Additionally, there is a wide range of technical indicators that investors should understand. This plays into the section above on having a trading education. So, if you can combine technical indicators with an understanding of speculation, finding penny stocks to buy can be easier than previously imagined.

3. Creating a Penny Stock Watchlist

We've covered this topic numerous times in the past few months. But, if you're unfamiliar, let's take another look. Creating a penny stock watchlist is the best way to get yourself ready for trading. While it may sound complicated, there are a few techniques to make the process as easy as pie. The first is setting up a scanner.

This can be done on popular trading platforms like ThinkOrSwim and via online resources as well. However, ThinkOrSwim tends to be the most used scanning software out there. Oh, and did we mention it's free? On ToS, investors can input information such as volume, long-term trends, industry, technical indicators, and more. This will then spit out a list of anywhere from one to hundreds of stocks depending on your parameters.

The most simple search is to put a price limit at $5 (all penny stocks are under $5), and set your volume to over 1 million. This allows you to see a large list of all penny stocks that have a decent and steady trading pattern.

[Read More] 4 Reopening Penny Stocks For Your 2021 Watchlist

For those unfamiliar, volume is the number of times a share is traded during the day. Under one million is fine, however the lower it gets, the harder it will be to enter and exit positions. For this reason, most tend to stick with 1 million and over. With a watchlist in hand, the next step is to research every penny stock on it. This is the best way to ensure confidence in the companies you plan to invest in.

3 Robinhood Penny Stocks to Watch Right Now

1. Obalon Therapeutics Inc. ( NASDAQ: OBLN )
2. Timer Pharmaceuticals Inc. ( NYSE: TMBR )
3. Tetra Technologies Inc. ( NYSE: TTI )

Are Penny Stocks Worth It?

At the end of the day, all of this information is only helpful if you put it to use. Spending time to learn how to trade penny stocks will be the best way to avoid losing money in your portfolio. However, because penny stocks are so volatile, there is always a chance to do so.

And while penny stocks have gotten a bad rap over the past few decades, the reality is that there are plenty of valuable companies under $5 out there. Knowing how to find them and which ones are worth it, however, is on you.