2020 has been a rollercoaster ride for the financial markets. Geopolitical events notwithstanding, the stock market has endured tremendous upheaval, and delivered surprisingly outsized returns.
Traditional investments include indices, commodities, forex, and stocks, with peripheral investment options in the form of cryptocurrency, real estate, bonds, et al. One niche category of financial instruments has also come into its own, notably penny stocks.
Once eschewed as nothing more than worthless pink sheets, the right penny stocks have tremendous growth potential. Naturally, due diligence must be performed to gauge the viability of these stocks.
Penny stocks are defined by the SEC (Securities and Exchange Commission) as company stocks which trade under $5 per share. These financial instruments are small-cap companies, often in the start-up phase of operations. They don’t have much market exposure, or media coverage, and are often touted by way of their prospectus alone.
Penny stocks, like traditional blue-chip stocks listed on exchanges, represent shares of companies. There are notable differences though: Penny stocks are usually traded OTC (over-the-counter) as pink sheets, and therefore not subject to the stringent reporting requirements of the SEC.
Films like the Wolf of Wall Street, and Wall Street: Money Never Sleeps glorify the underhanded practices of stockbrokers and their sales teams vis-à-vis penny stocks. Be advised, penny stock trading can feel like gambling, because you don’t have all the information you need to make betting decisions.
Some penny stocks traders are superstitious, and like to see how their luck plays out first before they trade stocks. It may feel like the random chance of spinning the slots at sites like www.mansioncasino.com/uk/slots/irish-luck, or others. But truth be told, there are hard and fast ways to successfully trade penny stocks. These will be explained in the following paragraphs.
What Value Proposition Do These Penny Stocks Offer?
For starters, these financial instruments must offer a value proposition to traders, to warrant interest. A penny stock which represents a company with a breakthrough technology may indeed warrant consideration.
Unlike traditional stocks which fluctuate within a limited range from day-to-day (barring exceptional circumstances), penny stocks can move between 10 and 80 times their value during periods of high volatility. Often, these stocks have low trade volumes and low liquidity, but that changes in a heartbeat with a little media exposure, or interest by big-name companies.
A veritable explosion in virtual trading has taken place in 2020, helping to propel penny stocks in a big way. A stock priced at under $5 has plenty of room for upward growth, compared to Google (GOOG), Apple (AAPL) or Berkshire Hathaway (BRK:A) which tend to gain incrementally, not in outsized volumes.
While blue-chip stocks are strong growth performers, they pale in comparison to the potential of a penny stock about to take off. Investors and traders liken penny stocks to getting in with a stock at ground level and riding the elevator all the way to the top. Facebook (FB) and Amazon (AMZN) are both examples of penny stocks that took off.
The key to successfully negotiating penny stocks is research. There is often very little newsworthy data about these companies and their performance, save for the prospectus. However, many notable trading platforms and brokerages offer tools and resources which scan the markets for penny stocks which are experiencing changes in trading volumes and pricing.
Stock scanners and screeners can help illuminate these options. Once a group of penny stocks has been identified, the next step is to ascertain whether the news will help or hurt the stock. Money can be made in both directions. In order to profit from these instruments, volatility and liquidity must come into play.
Timing Your Penny Stocks Trades to Perfection
Traders can short penny stocks if they suspect that bad news is on the horizon, or alternatively go long on penny stocks if bullish sentiment exists. The trick is knowing how to time trades to perfection. If you get in too late, you’ll likely miss the boat. Predetermined objectives are necessary when trading penny stocks. A profit point must be set and adhered to.
Too many traders assume that a rising stock will continue rising, and stay invested for too long, ultimately seeing their investments crater. By the same token, traders may stay in a trade too long, while the stock is falling, hoping for a reversal. Set take profit and stop-loss orders, and don’t look back. The trick to trading penny stocks successfully is making incremental gains on stocks over a long period of time.
One-hit wonders may come from time to time, but they are the exception to the rule. All the penny stocks millionaires have made their money over many years, by taking increasing percentages of the majority of trades that they’ve made. It’s hardly ever a case of hitting the jackpot with one penny stock and never looking back again.
The objective of trading these financial instruments is the acquisition of knowledge. By learning what works and what doesn’t, implementing the requisite strategies (technical and fundamental analysis), understanding market dynamics, and learning to read charts, graphs, and patterns, it is certainly possible to improve your win/loss ratio in this arena.