Penny stocks are high-risk securities that sell for a low price and are typically associated with new or struggling companies. A key point to remember about penny stocks is that they typically sell for less than $4 per share and are not listed on major market exchanges.
Many people often refer to penny stocks as microcap stocks, but while they do overlap quite often, they are not the same thing. The term microcap refers to the stock’s market capitalization, which would be between $50 million and $300 million. Penny stocks are named based on the amount per stock as well as the market on which it is sold.
Typically, microcaps are found in different markets, whereas penny stocks are more limited to the markets in which they are sold. Penny stocks are mainly traded on pink sheets or the over-the-counter bulletin board (OTCBB) in the US; however, they do sell in a few different markets in Canada.
How Do You Find Penny Stocks in Canada?
Penny stocks can be found on the Toronto Stock Exchange (TSX), TSX Venture Exchange(also known as the Canadian Venture Exchange), Canadian Securities Exchange, and the NEO Exchange; however, they are more commonly found on lesser-known exchanges.
As a company grows, it will get moved to different exchanges, or it could get moved so the company can get more exposure, increase liquidity and raise its availability to small and large investors.
What is the Difference Between Regular and Penny Stocks?
Now that we have gone over what a penny stock is, how is it different from regular stock? Well, it might not seem like there is much other than price, but there are actually a lot of differences between a penny stock and a regular stock.
Penny Stocks and Risk
The first difference between penny stocks and regular stocks is that penny stocks are much riskier. This is for a few different reasons. The main one is that penny stocks are mainly sold by companies that aren’t well known, so not a lot of research can be done on the company itself to make accurate market predictions, unlike regular stocks. Regular stocks have had extensive market research done, allowing the investor to make a more educated decision regarding the stocks they purchase and sell.
Because penny stocks are cheap to purchase and quite volatile, and can dramatically increase and decrease in price, you can make a lot of money on them. However, this is mostly luck, so the more you invest in penny stocks, the more likely you are to lose.
Stocks and Scams
Another big risk with buying penny stocks is scams. Because penny stocks are mostly companies that are not well known, it is easy for scammers to create a company and then sell these stocks. The lack of information regarding these companies makes investing in them very unpredictable, and it is a very common way people commit investment fraud.
Selling Strategies for Both Types of Stocks
For regular stocks, because you’re able to do the research, you can keep a lot of them in your portfolio and sell them based on market research. Penny stocks are different. A good strategy if you invest in penny stocks is to get rid of half of them once you have doubled your earnings. They should also only hold a small portion of your portfolio in order to reduce your risk of significant financial loss.
Where to Buy Penny Stocks in Canada
In order to purchase penny stocks in Canada, it is actually pretty simple. Just like other types of investments, the first thing that you need to do is find a brokerage that you want to invest with. You can do this with online brokerages such as Wealthsimple, Questrade or any other brokerage that works with penny stocks.
Ultimately, these are the two most common online brokerages for penny stocks in Canada. They are slightly different, so depending on the types of stocks and investments you prefer to buy, one may be a better fit for you than the other.
Wealthsimple
Wealthsimple is a great choice for investors, especially those who are younger. It is easily accessible online, has a $0 commission and trades stocks as well as ETFs. This brokerage platform is super easy to use, and they deal with plenty of penny stock companies.
The one downside to Wealthsimple is that, due to its limited range of investments, it isn’t an ideal platform for everyone to use. That’s based upon what type of investing you choose to do, as well as how frequently you want to invest.
All that you have to do is enter the Canadian penny stock ticker symbol that you want to purchase, select how many shares you would like to purchase and then buy them.
Questrade
Questrade is also a common choice of online brokerage for many investors. They have access to many penny stocks as well as the OTC (over-the-counter) market. This market holds a lot of penny stocks as well.
Questrade offers low commission fees. It is free to sign up for and has two different plan choices you can choose from. You can either pay $0.01 per share up to $6.95 or a flat trade rate of $4.95. It ultimately depends on your personal references.
Once you have done this, just like Wealthsimple, you can select the ticker symbol of the Canadian penny stock you would like to purchase and then select the number of shares and purchase.
While Questrade is similar to Wealthsimple, they offer a lot more investment choices, which is why they charges a small commission. On top of stocks, you can also invest in:
- Bonds
- ETFs
- Options
- Foreign Exchange (FX)
- IPOs
- CFDs
- Mutual Funds
- GICs
- International Equities
- Precious Metals
How Do You Trade Penny Stocks in Canada?
Now that you have created your brokerage account with Wealthsimple, Questrade or any other brokerage, and have started purchasing penny stocks, you’re able to start trading them.
When it comes to trading penny stocks, it is important to remember that they are unpredictable, and it is too easy to incur a loss. The best way to trade penny stocks is to get rid of at least half or not more once you have gained a profit or doubled your money. It is also important not to rely on penny stocks for a good portion of your profits. As we quickly discussed above, penny stocks are volatile, but they are also a great way to diversify your investment portfolio/
Are Penny Stocks a Good Investment for Beginners?
For many reasons, including the risks we detailed above. Penny stocks are not a great investment for beginner Canadian investors. They require a lot of research, and even then, because there isn’t much history regarding newer companies, they are a high-risk investment.
The term penny stock makes many new investors believe that this is the best bet for them due to the low prices, not realizing they actually lose a lot more money than if they were to invest in a more prominent stock that had a higher price per share.
Can You Make Money on Penny Stocks?
Just like any type of stock, it is possible to make money with penny stocks. However, it is important to note that there is a lot of risk with penny stocks. There are things you need to know in order to make informed decisions. There are also different tiers of penny stocks, which also make a difference in how much money you can make.
Tier 1
Tier 1 penny stocks are the ones that are listed on major stock exchanges like the Toronto Stock Exchange, NASDAQ or the New York Stock Exchange. These types of penny stocks are held to a higher standard because of the market and have to provide financial information to the market before they can be added. This allows for less manipulation and reduces the risk.
Tier 2
These types of penny stocks fall in the lower end of the $5 cap. They are usually between $0.01 and $0.99 per share.
Tier 3
This type of stock usually trades below $0.01 per share. They aren’t strong enough to price their stocks that high and are not featured on major markets.
Tier 4
Lastly, this tier is known as triple zero stock. They range between $0.0001 and $0.0009 per share. These often carry “hot penny stock” alerts and mostly benefit those who purchase the stock first.
Whenever you purchase penny stocks, it is important to do your research to verify the company is legitimate. If you stick to stocks on major exchanges instead of the OTC, you’re more likely to get a verified stock.
It is also important to stick to brokerages like Wealthsimple and Questrade, which have no or low commission fees. If you follow these few key things, you’re more likely to make money with penny stocks and less at risk for scams and fraud.
Do Most Penny Stocks Fail?
The thing with penny stocks is that even though you can make money with them, at some point, they will always fail. Here are a few reasons why penny stocks fail and why it is important to trade cautiously.
- Financials – The first reason is that these companies usually have a bad financial structure. They don’t have an effective business plan and will most likely go out of business at some point.
- Information – The lack of information regarding penny stocks makes it difficult to make an informed decision regarding the stock. Also, because many of these companies aren’t super well-known and haven’t been around long, the information you find on them isn’t always reliable.
- Minimum standards – Penny stocks have to meet minimum standards to qualify for certain markets. The NASDAQ, for example, requires a minimum of $1 per stock, or it gets unlisted. Ultimately, though, the smaller the exchange is on the stock, the less safe it is.
- History – Most of the penny stock companies don’t have a lot of history to look into. In other cases, they do not have a good track record, which is why their stock prices are so low. This makes it difficult to use the company’s history to make an informed decision.
- Fraud – Lastly, as we have mentioned before, the lack of things listed above makes penny stock a prime candidate for investment fraud. There are a few different ways companies can get away with fraud, but it is important to remember that it is always a risk and a big reason why companies fail.
Another thing to remember about penny stocks is the market cap. Because it is lower than prominent companies, that also puts it at risk of failing if it can’t raise itself out of the penny stock range.
Examples of Some of the Best Canadian Penny Stocks
Honestly, there are so many different penny stocks to choose from, but some are much more popular than others. Some are well-known companies that have taken a recent hit, and others are up-and-coming companies that are just starting out.
While there isn’t a large amount of information on these companies available, these few have proven to be legitimate and have a growing potential in their field. These companies can range from crypto mining to natural occurring mineral miners and even data intelligence companies. Even though there isn’t enough information to make accurate predictions, the potential is there.
Hive Blockchain Technologies (TSX: HIVE)
Blockchain technology is one of the trendiest industries at the moment. This particular company is based out of Vancouver, BC and is directly involved in the crypto mining industry. They work exclusively in Bitcoin, Ethereum and Ethereum Classic. This Canadian penny stock has potential for a high floor. It is important to remember, though, that the price of their stock follows the price of the cryptocurrencies that they mine,
American Lithium Corp (CVE: LI)
This company works with lithium, which is essential for rechargeable batteries like the ones found in electric cars, phones and other popular technologies. Because of these technologies, the demand for lithium has increased exponentially.
This company is also based in Vancouver, BC and has been around since 1974. It recently expanded into the uranium industry as well. Because of its involvement in lithium and uranium, as well as the rising demand for both of these, the company should grow a lot in the near future.
CloudMD Software and Services (CVE: DOC)
This company is also based in Vancouver, BC, and is considered to be a Canadian penny stock. CloudMD is a healthcare platform that deals with data-driven information. It provides virtual healthcare meetings, electronic medical records, and health education.
The stock has been decreasing since the COVID-19 pandemic, but it is predicted to go back up since virtual healthcare is still convenient for things like prescription refills.
FOBI AI (TSXV: FOB.V)
This company is a data analytics company that helps businesses with their efficiency while raising profits. They use AI as well as other methods to achieve this and have quite a list of customers. They also have a digital wallet with NFC technology for payments. This company’s shares have soared since they started, but have slowly started to decline.
Bombardier, Inc. (TSX :BBD.B)
Bombardier is a well-known company in Canada, but they have taken a hit since the pandemic. They used to be a leader in jet manufacturing, but they also manufactured trains, buses and other vehicles. They will likely need to expand globally to return to where they were before the pandemic, but now they have low stock prices.
Drone Delivery Canada (CVE:FLT)
As expected, this is a Canadian drone company. This company uses drones to deliver things like prescriptions, courier deliveries, and mining and gas industry deliveries. They focus on rural and hard-to-reach areas that are hard for people to reach but easier for drones.
Not only does this company have stocks in Canada, but also in the US and Germany. Being one of the top 10 penny stocks, Drone Delivery Canada has a large potential for future growth.ays do your research before you make any decisions.
Can You Buy Penny Stocks in a TFSA or RRSP?
Just like other types of trading, it is best not to trade out of a TFSA. When you trade frequently, the government could see it as you’re running a business and have to pay taxes on that money anyway. This leaves you prone to getting audited. It is best just to trade normally and claim what you trade.
Stocks can be held in an RRSP if they qualify, but it isn’t recommended to do so for penny stocks because they are so high-risk and volatile. If you choose to do this, it is better to do so with a more secure stock that isn’t so volatile.
Things to Consider When Investing in Penny Stocks
When it comes to stock market investing, the penny stock market holds different companies than traditional stocks. With traditional stocks, you see more cash flow within the companies, and you don’t see as many highly speculative investments. Plus, on the OTC markets, you mainly see small companies, early-stage companies, and companies with different company fundamentals.
Due to the low liquidity and low-priced shares, unsuspecting investors could lose a lot of money. Investment advice, along with consulting research companies, is key when it comes to making money with penny stocks. It’s often with a small investment through due diligence, and selling during the growth phase, where investors make money with penny stocks. The high volatility, especially when deciding between two companies, can keep other investors away from a great company, which is when success can also be found.
Since commodities are always changing, as well as drilling results and the worth of the dollar, you have to be aware of these stocks. You need to watch closely, even in other countries, and limit orders. It’s also important to pay attention to the value to ensure that you make sound decisions.
