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Difference between Day Trading and Penny Stock Trading

Updated on 2012-09-12 by Tom Huggens







Anyone who wishes to start a trading career should be well-informed of the various opportunities available. If you are in pursuit of the best vehicle to ride for a successful trading career, you may have heard of terms like day trading and penny stocks trading thrown around by trading gurus. You may have met gurus touting the advantage as well as the disadvantage of one over the other. Here, in this article; we make a no-frills, no-hype comparison of these two means of trading so you get to decide based on the merits of these trading platform and nothing more.


Day Trading and Penny Stock Trading Defined

Technically, day trading refers to the buying and selling of financial instruments within one trading day. Common financial instruments that can be day-traded are stocks, currencies, options and futures contracts. For the sake of the points in this article, however, we use the term day trading to mean as trading stocks listed in major exchanges in one trading day.

If we use Securities and Exchange Commissions’ (SEC) definition of penny stocks, these refer to stocks that are priced $5 or lower. However, if you visit forums, articles and traders discussion board, you will notice that there are variances in everyone’s definition of this term. Just to make sure we’re all on the same page; let’s take the term “penny stocks” to mean those stocks that are traded on over-the-counter bulletin board (OTCBB) or pink sheets.


What is the Advantage of One over the other?

You alone should be able to pinpoint which one is better for you. There’s no such thing as one-size-fits-all in trading. We have different approaches to trading as well as varying levels of risk tolerance. For this reason, we discuss on several points of difference in both trading styles below:


Initial Investment

Day trading stocks listed in NYSE and NASDAQ is regulated by SEC. Under the provision of a FINRA rule, a day trader who executes more than 4 trades in 5 trading days have to have at least $25,000 in his margin account. All brokerage firms are required to abide with this rule and that is why if you wish to start day trading, you must at least have a ready capital of this amount and in most cases, more.

On the other hand, penny stocks trading require very minimal initial capital. Some brokerage requires minimum of $500-1000 capital while others will let you open an account without any funds in your account right away.


Level of Risk

There is always a certain level of risk that we all have deal with and manage as a trader. For day trading, the risk is that you have to put up a relatively bigger initial investment even if you’re just starting out. And make no mistake about it, there’s bound to be a learning curve to conquer before you can fully get the ropes on day trading.

As for penny stocks trading, the risk is that you will have to trade small cap companies which could make big moves both ways. One big move could spell out a jackpot or a wipe-out for you. Furthermore, you need to do more due diligence in researching each penny stocks because unlike companies listed in major exchanges, company information may not be readily available.


Payoff

If you are someone who can stomach any level of risk, the reward may be the determining factor in your choice of trading style. In day trading, the payoff can range from low risk/reward to high risk/reward ratio depending on the strategy you employ.

On the other hand, the very reason why most penny stock traders stick to this kind of trading is probably due to its very high rewards. Just imagine, say for example you bought 10,000 shares of stock XYZ at 30 pennies per share. You would have to put up $3,000 capital to do this. Say, the stock, due to positive news on the company, soared to $1. You would have profited $7,000 from your $3,000 capital. Moves such as this can happen for penny stocks and that’s why traders are always on the lookout to favor the side of the stock’s movement.

These are the major points to consider in deciding which kind of trading to go for. On one hand, you have a closely regulated, high initial capital day trading with wide range of risk/reward. On the other hand, you can choose to go for penny stocks trading which requires very minimal initial capital with a risk/reward ratio on the extremes. Both require considerable time and experience to get the ropes on and both can be very lucrative when you do get the hang of it. But overall, it’s still your trading personality, available capital, and risk tolerance that dictates which trading vehicle is best for you.








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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.