As I’m sure you already know… penny stocks are an often talked about topic in the world of trading — and everyone seems to have an opinion! Most of the time, these are quite polarizing. Some swear by their potential to give you extraordinary returns, while others consider them to be the kind of high-risk investment to avoid. But today, we are trying to give you a fair view of what penny stocks are and how they fare as long-term investments.
The aim here is to help you make your own decision in regards to investing your time and money in penny stocks.
Trading, in general, isn’t for everybody. This is especially true for trading in penny stocks.
They can be high profit but high loss too, which is what makes them a high risk in the first place. Not every trader is capable of rationally handling these extremes. Over the last few years, penny stocks have garnered a lot of attention. A mainstream Hollywood movie, “The Wolf of Wall Street” started a dialogue about “pink sheet” stocks and how investing in them is often a huge scam, which most of the stocks on the pink sheets are. Reputable stocks are traded on the Nasdaq and NYSE exchanges. But with any kind of investment, no investor should ever jump into them without doing their due diligence.
When penny stocks trading has a solid foundation of good technical research, the results can be extraordinary. There are various ways to get these results. Intraday trading is a common way of going about it where more than investing, the goal is to get quick profits. Swing trading is another popular option where you buy small cap stocks and hold them for several weeks or months. Short selling is another way to trade in penny stocks, but not a very common one since the risk can be higher than usual. Another one, the one with the pure intention of investing, is a long-term investment.
This kind of investment can be high risk but high profit too. Investing shouldn't be done carelessly and any trader planning to do it must know exactly what they're doing.
According to the SEC, a penny stock is a small or a new company’s stock that trades for less than $5 per share.
Penny stocks can be purchased OTC or Over The Counter (which isn’t that great of an exchange due to liquidity problems), while more reputable penny stocks are available on major exchanges such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ). Penny stocks are pretty risky, but that’s why they have the potential of turning a relatively small investment into big profits. A large percentage of credible penny stocks trade on the Nasdaq while the rest get traded in the over-the-counter market via the OTC Markets Group.
1. The OTC Bulletin Board
The first is OTC Bulletin Board stocks and the other is pink sheet stocks. The OTC Bulletin Board (or OTCBB), is a United States electronic quotation service which is operated by the Financial Industry Regulatory Authority (FINRA) for its subscribing members. These stocks must meet certain SEC guidelines. While these guidelines must be met, they’re nothing compared to the guidelines a company needs to meet when listed on a major exchange. Unlike OTCBB, pink sheet stocks don’t necessarily need to meet any SEC guidelines.
2. Pink Sheet Stocks
There is hardly any reliable data about these companies which makes it difficult to do technical analysis. There’s a lot of ambiguity about the validity of companies with pink sheet stocks. This ambiguity doesn’t translate to smart decision-making. It is highly risky and the chances of you discovering a company like Microsoft or Facebook is extremely low. It’s almost like trying to find a diamond in a coal mine. I urge all my students serious about their careers to avoid these two exchanges and recommend sticking to penny stocks traded on NASDAQ only.
Increased visibility, liquidity, and credibility of stocks are some of the important reasons why you must trade only the stocks on Nasdaq and make sure you avoid OTC and Pink Sheets under all circumstances. There are a few important reasons why I recommend trading in penny stocks listed on Nasdaq.
A blue-chip stock is a company with a well-established business, decent reputation, and a legitimately good financial statement.
They’re traded on major exchanges such as NASDAQ and NYSE. Blue chip stocks are usually large-cap stocks, meaning they have a market valuation of $10 billion or more. Such companies tend to have a good reputation and so the stocks issued by them are highly valued in the market. Trading or even investing in them is definitely less risky than trading penny stocks. But this safety comes at a cost!!! Blue Chip Stocks are definitely a safer option, but a big disadvantage is that you also can’t earn big profits in the same way you do with penny stocks — where you can find trades that can potentially return anywhere from 50% to 100%+ returns on a single trade.
To be honest, at the beginning of my career,
I didn’t have enough capital for blue chip.
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. 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). All of these reasons make getting into the field of blue chips difficult for a beginner to truly realize profits. In the world of Blue Chip stocks, a lot of the trading is done by algorithmic traders and large hedge funds. Competing with large computer systems is next to impossible for any regular human trader.
On the other hand, the Penny Stock market provides a much more level playing field, as long as you know the ins and outs of what to do, which is why having the right mentor is so important. The reason for this is because the hedge funds and algorithmic traders make trades with extremely large transaction sizes, so they stay away from these stocks because they don’t want to accidentally buy out the company. Otherwise, hopping into the Penny Stock field without knowing what to do leaves you facing a lot of risks (and you could end up blowing your account). So yes… penny stock trading is risky. But it is also rewarding!
It’s about choosing what works for you depending on how much risk you can afford to take, your personality, style of trading, and your long-term goals.
Benefits Of Trading With Penny Stocks
Some of the biggest benefits include:
Low share prices
This is one of the reasons why penny stocks are enticing to some. Since the prices are so low, you can buy a larger quantity of shares. Because the individual prices of penny stocks are low, they’re a feasible investment for beginners. They can get started with their trading career even with low capital. If you have been refraining from investments due to lack of capital, it might be worth considering penny stocks.
The abundance of shares automatically means your profits will be high (so long as the stock price increases, of course). The opportunities to make money with penny stocks are high if you know what you’re doing. The truth is, for a dedicated student willing to manage the risk, you can expect to get a positive return on your investment within the first six months. Even for a seasoned trader like me…
In June 2020, I made 1.15 million dollars in a single month! And $11 million in verified trades to date, according to Kinfo.
Short term investment
You need to trade Penny stocks quickly. If you expect an increase in stock price, put in your money, and get out with the profits as soon as the price increases. If you wait around too much, the chances of earning a profit are very low. That’s why when it comes to penny stocks, intraday and swing trading are your best bets. Because you have to trade quickly, investing in penny stocks ensures you start to see some profits fairly quickly as compared to other forms of investment.
When Trading With Penny Stocks
There are some major downsides to trading with penny stocks that you need to consider before you start trading. This does not mean you must refrain from penny stocks. In fact, it means the opposite. Be aware of the downsides so that you will know what you are doing and can be successful even while trading penny stocks.
If the profit is high, the risk is high too. If in the previous examples the stock price of XYZ company falls to $1, you immediately face a $1,000 loss. However, if you keep a check on your risk management practices, you can manage this. As a trader who is well on the way to making this a full-time career, you’ll make multiple trades each day so setting your upper limit of risk at 1% ensures you minimize any losses (while still allowing you to build your portfolio). I go into this in more detail in this article.
Intraday, swing trading and short selling are usually the preferred ways of trading penny stocks. With their highly volatile nature, it’s best to look for a window where a share price increase is predicted based on technical analysis. Selling those shares as soon as you think it’s reached its peak (or doing the reverse if you’re doing a short sell), is the best option here. Waiting around beyond that can result in a major loss. Investing inherently means a long-term trade. The kind where you wait around for months or maybe a year (in this case) before selling off your shares.
Penny stocks are volatile by nature. Their share prices are unpredictable and can be easily manipulated by making large purchases. This is a GOOD thing in my opinion. This is why some of my students are able to make the money they do. Because they take advantage of this volatility! When working with a highly volatile stock, the risk is higher but the chances of success are also high. So this seeming downside of penny stocks is something you can take advantage of.