Hey there! Are you looking to dip your toes into the world of stock market investing, but don’t have thousands of dollars ready to invest? Trading penny stocks on Cash App might be perfect for you.
Penny stocks, which are stocks that trade for less than $5 per share, offer an affordable way to invest in the stock market. And Cash App makes it easy to buy and sell these microcap stocks right from your phone. But penny stocks do come with substantial risks and challenges.
This guide will walk you through everything you need to know as a beginner investor looking to trade penny stocks on Cash App. I’ll explain what penny stocks are, the risks involved, how to research companies, trading costs, and tips for building a penny stock portfolio. My goal is to provide you with a full overview so you can make informed decisions if you decide to invest in these inexpensive yet volatile stocks. Let’s dive in!
What Are Penny Stocks?
First things first – what exactly are penny stocks?
Penny stocks are shares of small companies that trade for less than $5 per share. Most penny stocks have a market capitalization of less than $300 million, which is tiny compared to large companies like Amazon that are worth over $1 trillion. Penny stocks trade over-the-counter (OTC) through decentralized marketplaces rather than on major exchanges like the NYSE or Nasdaq.
The low per-share price allows investors to buy lots of shares without needing thousands of dollars. But it also means penny stocks experience high volatility. Their share prices can swing dramatically on a daily basis. A cheap stock trading at $1 per share could easily gain or lose 50% or more of its value in a single day!
While penny stocks do offer the appeal of sky-high percentage returns, they also come with significant risks for investors. The lack of widely available public information makes it difficult to research the underlying companies. And the potential for manipulation, fraud, and bankruptcy is much higher than with stocks of mature companies.
Why Trade Penny Stocks on Cash App?
So why would anyone decide to trade penny stocks on Cash App given the substantial risks involved? Here are a few of the advantages:
- Affordability – You can start trading penny stocks with just a few dollars. Cash App allows you to purchase fractional shares, so you can invest just $1 or $5 into a stock if you want. This makes it accessible for beginners without much starting capital.
- Simplicity – Opening a brokerage account can be complex, but Cash App Investing is tied to an app you may already have on your phone. Buying and selling stocks takes just a few taps.
- Instant Availability – You can start trading penny stocks on Cash App right away after transferring money into your Cash App Investing account. Other brokers often have lengthy account approval processes.
- Zero Commissions – Almost all brokers now offer $0 stock commissions, and Cash App is no exception. You’ll pay zero commission on any stock trades.
The main drawback with Cash App is it provides virtually no research capabilities or screening tools to analyze potential investments. The inventory is also limited to more well-known penny stocks. So doing your own due diligence is a must.
The Substantial Risks of Trading Penny Stocks
I want to reiterate penny stocks carry substantial risks that you must consider before buying any shares. Here are some of the major hazards:
Liquidity Risk – Low trading volume makes entering and exiting positions difficult. Trying to sell when there are few interested buyers can be frustrating.
Extreme Volatility – Share prices fluctuate dramatically. Stocks can lose over 90% of value in months, or gain hundreds of percent in weeks during euphoric runs. Don’t trade penny stocks unless you have an iron-clad stomach!
Lack of Public Information – These companies are too small to get analyst coverage or trade on major exchanges with reporting requirements. Doing your own due diligence on the company, its financials, products, and management is essential.
Potential for Fraud or Manipulation – Intentionally promoting worthless penny stocks through paid campaigns and then dumping shares is an unfortunate reality in OTC markets. Some stocks are outright scams or shells. Avoid any overly-promotional stocks.
Bankruptcy/Delisting Risk – Penny stocks have a relatively higher risk of bankruptcy, which would result in a total loss on your investment. Stocks can also get delisted from exchanges if they no longer meet listing requirements.
The Critical Need for Risk Management – Given the above risks, every penny stock trader must utilize stop losses, position sizing, portfolio diversification, and other risk management techniques to try to limit their downside.
The rewards may be sweet with penny stocks, but the risks are just as bitter. Protect yourself or you may get burned if you are not extremely careful!
Conducting Due Diligence on Penny Stocks
To help mitigate some of the risks of trading penny stocks, it’s essential to thoroughly research companies before buying shares. Here are some steps you should take:
- Review SEC filings, press releases, and other financial reports from the company website. Look for potential red flags.
- Learn about the company’s products, services, and target markets. How do they make money and who are their customers?
- Understand the competitive landscape. Are there advantages this company has over rivals in the space?
- Check for analyst coverage or price targets if available. Some penny stocks are covered even with minimal research.
- Look into the management team’s background. Do they have prior successes or concerning failures?
- Analyze valuation metrics like the P/E ratio or P/S ratio relative to peers. Is the company overvalued or undervalued?
- Watch out for paid stock promotions or “pumps”. These often reveal schemes to take advantage of investors.
- Join investment chat rooms or forums to see what others are saying, but take with a grain of salt.
Conducting thorough due diligence like this takes time but is vital to avoid investing in fraudulent or doomed companies when trading penny stocks. Don’t trust anyone blindly and do your own research!
The Costs and Fees to Consider
One advantage of trading penny stocks on Cash App is there are no commissions charged on trades. This means you can buy and sell stocks frequently without racking up fees.
However, you will still incur some other costs:
- SEC fees – These are small regulatory fees paid on each transaction of $.00219 per $100 traded. They add up to a few cents per trade typically.
- TAF fees – Similarly, small Trading Activity Fees (TAF) are collected on each trade to cover operations costs. These run $.000130 per share.
- Bid/Ask Spreads – The difference between the bid and ask prices when you enter and exit trades. Spreads are wider on penny stocks due to lower liquidity.
- Short-Term Capital Gains Tax – You’ll owe income tax on any profits if you sell penny stocks short-term, just like regular taxable investment accounts.
- Wash Sale Rule – If selling a stock at a loss and rebuying within 30 days, the capital loss is disallowed under IRS rules.
So make sure you factor in these costs when evaluating potential penny stock investments and their profit potential. Taxes and spread costs can eat into your returns.
Strategies and Tips for Trading Penny Stocks
If you decide to dive into penny stock trading on Cash App, use these strategies and tips to tilt the odds in your favor:
- Start very small – only invest an amount you can afford to lose entirely. Penny stocks are not for your life savings.
- Diversify across multiple stocks and sectors to reduce company-specific risks in your portfolio. Don’t go “all in” on one pick.
- Use limit orders rather than market orders so you control the entry and exit prices. Market volatility can otherwise really cost you.
- Have a plan for every trade before buying. Set a price target where you’ll take profits and a stop loss level to control losses.
- Pay very close attention to trading volume. Only trade when volume is sufficient to allow entering and exiting positions with ease.
- Don’t fall in love with a stock. Trade on numbers and data, not emotions. Cut losers quickly.
- Consider both fundamental and technical analysis. Combine company research with chart reading to identify opportunities.
Take it slowly, manage risks, and stick to these disciplines when initially trading penny stocks on Cash App to hopefully avoid major losses.
Key Metrics and Ratios to Evaluate Penny Stocks
In addition to qualitative research on the underlying company, make sure you look at key quantitative metrics and ratios to evaluate penny stocks:
- P/E Ratio – Price divided by earnings per share. Lower ratios tend to mean cheaper/undervalued stocks.
- P/S Ratio – Price divided by annual sales per share. Useful for unprofitable companies without P/E.
- P/B Ratio – Price divided by book value per share. Compare to peers to identify undervaluation.
- EV/Revenue – Enterprise value divided by total revenue. Normalizes market cap based on company size.
- Short Interest – Percentage of shares shorted vs total float. High short interest can spark squeezes.
- Average Volume – Critical for ensuring high liquidity and ease of trading.
Crunch these numbers on penny stocks to find hidden opportunities and avoid potential landmines. The data doesn’t lie if you know how to read it correctly!
Building a Penny Stock Portfolio on Cash App
If you want to create a penny stock portfolio on Cash App, here are some tips:
- Start with just 5-10 stocks across different sectors so you are diversified. Any more than that gets tough to track.
- Reinvest your profits from winners into increasing the position size gradually over time. Let your winners ride!
- Rebalance back to target allocations periodically. This forces you to trim hot stocks and buy more beaten down names.
- Size positions according to risk. Higher conviction picks can be 10-15% of the portfolio. Speculations stay under 5%.
- Manage risk at the portfolio level, not just for individual stocks. Diversification and allocation sizes are key.
With penny stocks, it’s all about maximizing your winners and minimizing your losers through smart portfolio construction.
And there you have it – an in-depth overview of penny stock trading on Cash App to get started! While penny stocks offer that appealing combination of high percentage returns and low buy-in cost, they undoubtedly come with substantial risks. Managing those risks through thorough research, valuation analysis, disciplined trading, and portfolio diversification is absolutely essential.
Cash App provides an easy starting point for trading penny stocks if you’re a total beginner. Just be sure to start very small with money you can truly afford to lose, and stick closely to your risk management rules. If you speculate wisely and avoid falling in love with any picks, you may just score some lucrative wins with penny stocks!
Just remember, penny stocks are highly volatile Tickers that require an iron-clad stomach and diligent research. Trade carefully and have fun running your own penny stock portfolio on Cash App. Hopefully this guide gave you all the tools and knowledge needed to dive right in while avoiding major mistakes. Let me know if you have any other questions!