Penny stock day trading is often regarded as an alternative to generating higher returns compared to regular stock day trading, as the former relates to small-cap companies whose share price is below $5. Most companies with low-priced stocks have, in theory, much room for growth, being able to double or triple their market capitalization in a short span of time. You wouldn’t expect Google and Apple to double their capitalization overnight considering their tremendous size. This is why some investors believe that penny stocks day trading represents a better option that can secure astronomical returns. This is, however, far from true.

Indeed, day trading penny stocks and regular stocks is similar in many ways. First of all, traders are open for an active investment with the potential to generate a high percentage of return within hours and sometimes even minutes. Also, both forms of trading should be heavily dependent on fundamental analysis at the core, with the technical analysis to be used as a tool to confirm the entry and exit points.

Nonetheless, there are many noticeable differences between penny stocks and regular stocks. Here are a few differences that must be considered:

Penny stocks are issued by small companies that generally provide one type of product or service and have only one market.

Penny stocks are generally traded over-the-counter (OTC) while regular stocks can be bought and sold on public exchanges (such as the New York Stock Exchange or NASDAQ).

The US Congress banned broker-dealers from carrying out transactions in penny stocks unless the latter ones comply with the rules of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”).

The reason why penny stocks fall under special regulation is simple – they involve too much risk and are regarded as speculative instruments. Those who invest in penny stocks should be ready to lose the entire amount of investment with no possibility of return. Moreover, if penny stocks are bought on margin, the loss can be ever faster. For day traders , the risks associated with penny stocks should make the list of the main concerns. You should expect more scams and sudden bankruptcies particularly in the penny stock market, especially because young and micro-cap firms are often affected by the fierce competition and cannot accurately assess their business potential and adjust to the changing market conditions.

, the risks associated with penny stocks should make the list of the main concerns. You should expect more scams and sudden bankruptcies particularly in the penny stock market, especially because young and micro-cap firms are often affected by the fierce competition and cannot accurately assess their business potential and adjust to the changing market conditions. The companies behind penny stocks often rely on aggressive marketing to exaggerate their value in the eyes of investors. For example, when such a small company secures a deal with a major brand, its promoters will tend to induce the feeling of guaranteed future success and will act as if it hit the jackpot, which is often the case.

While it is true that penny stocks involve much higher risk, many of today’s giant companies started as small caps. It means that some penny stocks might generate astronomical returns indeed, but traders should do a lot of research in order to find the experienced teams with great business plans. Regular stocks enjoy more credibility from investors and traders because they are much more stable.

While penny stocks and regular stocks are different in many forms, traders can diversify their asset base and trade both. The important thing is to start with small deposits in either case. For example, many who trade funded accounts tend to balance their risk by trading both ‘regular’ and penny stocks.