Why Penny Stocks Are High Risk And Why That Is Good

Okay, so it’s true… Penny Stocks are high risk! BUT… this is actually good news for you!!

Let me explain…

Every trader, no matter how big or small, knows that penny stocks are high risk. That part isn’t really a secret. What is a secret (from the beginners, at least) is knowing how to actually make some money by trading penny stocks.

No, I’m not talking about get-rich-quick scams that take advantage of inexperienced investors who get lured into investing their hard-earned money into absolutely worthless companies. I am here to tell you how to go about penny stock trading by using a realistic approach that will help you assess your risk and keep your trading in check.

Penny stocks have always had an interesting reputation. When Jordan Belfort’s story became living room talk because of The Wolf of Wall Street’s insane popularity, many people started paying attention to penny stocks.

The interesting thing to note here is that the movie clearly portrays penny stocks in a bad light. It tells you how people like Jordan Belfort scam these naive investors into putting their money in bad companies.

Still, it garnered attention because any kind of attention, positive or negative, is still attention.

Since then, the popularity of penny stocks has also seen a decline. Many investors prefer to not even touch them. Interestingly though, last year suddenly saw an increased interest in it. Analysts believe the pandemic and social media could be a reason behind this new peaked interest . So many around the country lost their only stable source of income.

This led to many wanting to look into trading and fall for the get-rich-quick promises made by companies running penny stock scams.

Social media platforms like Twitter and Reddit have been used as a tool to hype up dirt-cheap stocks, in order to entice an unsuspecting trader into buying them. Both of these factors seem to have contributed to this unexpected rise.

After discovering them, people often jump in too quickly. Their laziness translates to them not doing any research of the companies that they’re planning to invest in that apparently have potential. Scammers take advantage of this and it all ultimately leads to you losing your money.

So the simple fact that needs to be considered here is this: Putting any of your money into penny stocks is a huge risk.

But something important to note is that if you do your due diligence and be smart about how to choose to trade with penny stocks, you can come out of it making a decent amount of money.

As someone who has made money in volatile conditions and even in the unpredictability of 2020, I can say with confidence that the volatility of penny stocks is something you can capitalize on.

In June 2020 I turned $70,000 into $1.15 million and made over $4 million total in 2020 alone.

You can find profits and success too, as long as you’re prepared and as long as you put in the work. I am here to help you through this. Firstly, let’s start with some basics.

Penny stocks are defined by the SEC (Securities and Exchange Commission) definition as stocks that trade for less than $5. These securities don’t trade on the NYSE.

They are lightly regulated by the SEC which often makes them very questionable.

In general, these stocks trade on what is known as “pink sheets,” OTC Bulletin (OTCBB), or the Nasdaq. There are minor differences between the two. The companies listed on the Nasdaq are the most reliable penny stocks. On the contrary, OTCBB stock companies are required to file with the SEC, unlike pink sheets. Now this may make it seem like OTCBB is more reliable than pink sheet stocks but it’s important to remember that both of these fall under the category of penny stocks and are best to be avoided.

Penny Stocks involve stocks of companies that have a small market cap and trade under $5.

Investment in Penny Stocks works really well when you have limited funds to invest and can afford to take some risks. Penny Stocks don’t cost a lot and can give relatively large returns.

After all, it’s more feasible to double your investment on a $5 stock than a $50 stock.

Penny Stocks have a low entry barrier, meaning almost anyone can enter, and, so long as they know what they’re doing, can double or even triple their investment in just a few months.

Buying a stock of a small company in bulk might seem like a good idea to a trader because “the more shares you own the higher chances of a big payout”. But what they fail to realize is that this also means that chances of big loss are high.

Let’s say a company called ABC has a share price of $2.50. The trader does minimal research and thinks it would be a good idea to buy 1,000 shares of it. This means the trader has put $2,500 into this trade. Now, the trader has heard of success stories about trading in penny stocks through the grapevine and hopes for a successful trade. If the share price increases by $1, there would be a $1,000 profit on the whole trade. Overall this would be a pretty good deal because the trader walks away with $3,500.

Now, imagine the share price going the other way though, which statistically is more likely to happen. If it drops by $1, the trader only ends up getting $1,500 out of the whole trade which is a clear loss of $1,000. However, if you short sell the stock, when the stock goes down by $1, you can earn a profit of $1,000.

This means that while high risk could equate to high profit, it could also equate to a high loss.

Stock promoters know this and try to take advantage of it. They know that people — especially the ones who are currently in a bad situation — tend to get greedy. This greed leads them to fall for such schemes and scams that promise them good profits in a minimal amount of time and with barely any work on their part. Sometimes it leads to trading with emotions and can make the beginner overtrade, which is something I have discussed in this article .

Trading based on emotions can lead to various types of losses .

But if you try and understand these scams and how they look, you’ll probably be able to make better decisions the next time you come across one. Let’s get into the depth of the most common scam that traders run into, the Pump and Dump.

Here, promoters will “pump” up the stock price of a bad or unknown company by using certain tactics. These tactics usually include hyping up the company via free penny stock newsletters, PR articles, and the most commonly used one these days, social media.

All the avenues are full of headlines that talk about how this completely unknown company is the new “it” company and why you should not waste anymore of your time and buy its shares.

But if you care to read the fine print in these articles, it becomes obvious that it’s full of fluff without any real information about the company. You’ll also end up finding out that these companies often pay stock promoters to hype up their company’s reputation.

Once the company’s stock reaches an inflated level, they “dump” these stocks at a huge profit. The stock price then obviously ends up decreasing and the investors are left high and dry with a huge loss in their hands.

There are other scams such as Short-and-Distort Scams, reverse merger scams, mining scams, guru scams, the No Net Sales fraud, and offshore rackets. Try not to fall for these and be smart about every decision you make as soon as the trading day begins.

What helps many in such a situation is having an experienced and active mentor who not only helps you understand what day trading is all about but also guides you through the process to make sure that you earn the right kind of profits.

Other than risks from losses and scammers, there are some myths about penny stocks that are believed by many traders — even some with experience.

Here are the two most common ones that need to be busted.

With high risk come the opportunities for high reward.

This is the major reason why penny stocks being risky is a good thing.

Penny Stocks work well for investors who have a limited amount of money to invest but still have the ability (and freedom) to take some risks. They are inexpensive and have the potential to produce big returns which is what makes them so popular (especially to new traders).

To put it simply, success in Penny Stocks is about knowing how to select the right stock based on examining patterns, then implementing strategies that actually work and making sure to incorporate proper risk management into your account through stop orders so you take minimal losses.

I’m often asked why I don’t just trade blue-chip stocks like Apple or Amazon.

Why Penny Stocks? Why day trading??

Well, Blue Chips Stocks are definitely a safer option, but you also can’t swing big profits in the same way you do with penny stocks, where you can find trades that can return anywhere from 50% to 100%+ returns on a singular trade.

Frankly, when I started, I didn’t have enough capital for blue chips. You need at least $100,000 to properly get into those markets and they only yield a low average yearly return of around 15-20% per year — which didn’t fit into my financial goals.

I would rather use my time to maximize my profits because my strategies have worked so effectively, that they have become second nature to me, even as the market adjusts.

The biggest advantage of Penny Stocks is that you can turn your portfolio into a six-figure account, all within a few short years (and sometimes sooner, based on my student’s results).

If you do your research right, learn from a helpful and knowledgeable mentor and stay focused on your strategies, you can take full advantage of the risky nature of penny stocks and turn them into a benefit.

Now that it’s established that penny stocks are truly very high risk, how does one even think about making some good returns on them?

The answer is simple… With some care and a whole lot of caution.

Sticking to these will mean that your penny stocks trade has the potential for some great returns. To be specific, mentioned below are some ways you can profit off of trading penny stocks.

Stick to stocks on the Nasdaq and avoid stocks on the OTCBB and the Pink Sheets. There is no alternative to doing your own diligence on a company you’re planning to invest in.

Check the company’s financial statements, see if there’s been any growth and, if yes, what are the growth patterns? Read up on whatever credible information is available on the company.

The credibility of information is very crucial and knowing how to tell its validity is a skill set every trader must learn. If the words used in an article about a company are all buzzwords that don’t actually hold any meaning, it’s a red flag that shouldn’t be ignored.

Most penny stock companies don’t release in-depth financial information because they aren’t required to.

Whatever financial information you do manage to find, scrutinize it properly. Check the balance sheets, look for substantial debt or liabilities, and its current liquidity. If this information indicates a plausible growth in the future, it’s a promising sign. Additionally, as a general rule, the more transparent a company is, the higher chances it has for growth.

At the heart of every consistently successful business is a well thought out business plan. As an investor, you can tell a lot about a business’s future based on its business plan. Go through it and evaluate how achievable it is. That should tell you all you need to know about the business’s potential.

A good business plan without good management to implement is just empty promises. Try to find out whatever information you can about the company’s management. Are they credible? Do they have relevant experience? Have they had other successful or failed businesses? These are some of the questions you need answers to before you can think about investing in a company.

If you have taken care of all these factors, it’s possible to mitigate the risks associated with Penny Stocks and make immensely good profits. Selecting the right stock is key. When you select the right stock, there is potential for high rewards.

Penny Stocks don’t cost a lot and can give relatively large returns.

After all, it’s more feasible to double your investment on a $5 stock than a $50 stock.

Penny Stocks Trading is a full-fledged career that, if you take it seriously and put in the work, can completely transform your life and help you achieve financial freedom.

Trading as a whole can be a risky business. There is no guarantee of success or failure.

So the only way you can bring some surety to it is by knowing what you are doing.

Trading in penny stocks is not the kind of trading you should just dive into. To get any kind of profit with it, it’s recommended you think about investing in a company from all sides. Don’t look at things from one perspective but try to look at them from every possible angle.

That’s what every good trader does.

And that is what a good mentor should guide you on.

Being such a mentor is what inspired me to create The Freedom Challenge.

If you’re ready to make an investment in your career, check out the course and make the right step towards a future with financial freedom.

And if you’re keen on learning more day trading tips, check out this Investing for Beginners series. I’m devoted to mentoring beginners in order to make day trading your primary source of income. I also invite you to take a few further steps with me:

Next steps.

It’s time you stop wasting time, missing opportunities, and losing money due to platforms that only give you access to part of the process. The mechanism is simple, effective and fast.

Speed and efficiency are two of the main things we focused on while building StockCraft. To make the most of watchlists and choose the best stocks possible, join the StockCraft family and get access to our powerful watchlists (and many other amazing features). Get access to our sophisticated screening software so you can track and follow the right stocks. Also, create your own Watchlists and get access to some of the ones we personally use. The time to make a mark in trading is NOW so the sooner you get started, the better. All you have to do is follow this link and choose the plan best for you and your trades.

And if you’re keen to learn more day trading tips, check out this Investing for Beginners series. I’m devoted to mentoring beginners in order to make day trading your primary source of income. I also invite you to take a few further steps with me:

Join The Freedom Challenge. This is my flagship program for traders who want to level-up and turn Day Trading into their primary income stream.

Subscribe To My Youtube Channel. This is where I share practical day trading tips and training on how to trade, as well as behind-the-scenes insights into the trades I make.

Join My Newsletter. I write these emails for people who want to learn the basic Day Trading Tips and the practical steps they should take to get started.

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