Ever seen the movie The Wolf of Wall Street?

In the film, Leonardo DiCaprio’s character rises to fame and wealth but he started with penny stocks. These are stocks worth under $5 and often involve starter businesses with a local niche.

But is there money in penny stocks? Can you make a living by investing in them? Can you learn how to invest in penny stocks and begin trading in a short period?

Don’t worry, we’ve got you covered. Here’s our guide to help you get invested in this type of stock exchange:

How to Invest in Penny Stocks

If buying penny stocks sounds like a good opportunity for you, read on to find out how you can start investing.

1. Find a Penny Stock Company

Nasdaq and NYSE have some penny stocks, but they have some listing requirements that might delist some penny stocks trading for less than $1 per share. You can find these instead through the Over-the-Counter Markets Group or on the OTC Bulletin Board.

Note that the OTC Markets Groups, which was the former Pink Sheets, stocks aren’t registered with the SEC, and they don’t have to conform to listing requirements. For this reason, Pink Sheets may carry more risk. The OTCBB is more legitimate and is the preferred choice of traders.

2. Select a Penny Stock Broker

The first thing you have to consider when choosing a penny stock broker is the fee structure. Some aren’t suited to penny stock traders, such as commission charged on a per-share basis.

In this structure, the broker charges a rate for a set number of shares. If you buy penny stocks shares beyond that number, there will be an additional rate for each share.

This is usually better for those buying only a small number of shares. For traders, what may be the better option is a broker charging a flat rate regardless of the number of shares.

You should also look at the trading restrictions of the broker. Some firms will impose limits on what types of trades you can do. Find one that will allow you to use the same online platform for trading other stocks. If the broker limits the frequency of trading in one order or in a day, find another one.

If you’re a beginner, you’ll want to find one without or with a little minimum deposit. Some brokers can have a minimum deposit of $10,000 and more, which are more suited to high-volume traders.

It’s also preferable if the broker offers mobile or online trading. Some might only offer call-and-trade, which means you’ll have to call every time you enter or exit a trade. They may also charge you each time you call them.

Having a mobile app or an online account you can access anytime makes trading stocks easier. You’ll also be able to see the prices and trade in an instant.

3. Determine What Stock to Trade

An easy way to choose stocks is to use stock screening tools, which you can find on Finviz or the OTC Markets Groups. You can filter the stocks by price, sector, and such.

If you’re unsure which company or industry you want to invest in, consider your passions.

Do you like clothes and general fashion? Do you have advanced knowledge of biotech? Are you looking for marijuana penny stocks to buy now?

From here, you can narrow down your search to your top penny stock picks. You can choose multiple of them, as we don’t recommend putting all your money on 1 stock. Diversify your portfolio to have more chances of earning positive income.

4. Avoid Penny Stock Scams

There are 2 types of scams in the penny stock market you need to be wary of. One is the so-called “pump-and-dump,” while the other is “short and distort.”

In the first one, a promoter hired by a shareholder or the company itself will hype the stock in order to push the price higher. They’ll send emails, newsletters, and such to “pump” out promises about the company’s future. Once the share price is high enough, the company or the shareholder who hired the promoter will “dump” the stocks back to the market, which will then cause the stock to fall.

“Short and distort” is the reverse of that, wherein a stockholder will “short” the stock. These are short-sellers, who will wager that the price of the stocks they borrowed will wager. They will also “distort” the stocks by spreading rumors that will cause the price to go down.

Some Tips in Investing Penny Stocks

Before you get started, though, there are some precautions to take and some tips to keep in mind. The penny stocks market is volatile; you can lose a significant amount of money if you go in without the proper knowledge.

1. Don’t Buy Stocks with Negative Earnings

A company with negative earnings is not an opportunity to buy low, it’s a big red sign that it’s about to go bankrupt. To see if the company is losing money, the stock has a “-“ sign in the P/E.

2. Be Cynical About Stocks

Each company wants you to think exciting futures ahead with a story about revolutionizing the world. You’ll have to be careful not to believe right away, even if your friends and family vouch for it. Instead, do your own research so you can see for yourself.

3. Research as Much as You Can

Before buying a stock, research the company first; read any financial filings from the company or the SEC. If they have none, it’s a sign you’d need to consider another penny stock. You’ll also need adequate knowledge about the industry to avoid falling for “puffery.”

Buying Stocks is More Complicated

Knowing how to invest in penny stocks is the first step, but you’ll have to study more about the subject if you were to start trading penny stocks. Remember that these stocks yield small results so it will take time and patience to see results.

Not sure which stocks to start with? Hoping to invest in bigger franchises?

Read our other guides today to learn more. Here’s one post that can help you pick the right time to buy stocks.