What Are Penny Stocks?

What are Penny Stocks?

If you are new to investing, it’s advised that the average investor should stay away from Penny Stocks.

No Major Market Makers:  This makes it very hard to sell penny stocks, if you buy any.  No one will be there to support or buy your shares automatically.  This is the reason why Penny Stocks are considered iliquid at times.  If you buy some shares at $0.03, and the last ticker reads $0.05, there is no guarantee that there are additional buyers that want to purchase shares at $0.05.  It’s highly advised that you subscribe to a reliable level 2 services for penny stocks, so that you can see how much bid and ask are on each side, and the volume.

Reporting is Limited, Fraud is Possible: You don’t know exactly the inner financial details of the company.  You have to trust what the company puts out which may not get audited by any third party.  They are not hold to the same standard as companies in Nasdaq or NYSE.   Be wary of stock brokers that may try to help you invest in Penny Stocks.   We recommend you do your own research and invest with your own account.

Insider Share Holder Could Be High:  It’s possible that insiders hold a lot of stocks, and so do investors who are owners in the stock.  These guys may have high stocks which they were assigned for free, during the creation of the company.  It could be investor relation guys, press guys, attorneys, top level executives, or anyone involved in bringing the company to the public.  Any of these guys may sell their shares right away on the open market if they don’t have restriction clauses on their shares.  When there is more selling than buying, the share price will drop to make up for that.  These guys won’t care about a depressed share price because they got the shares for free.

Now that you are aware about the disclaimers, we want to explore more about Penny Stocks.

Wallstreet.org breaks down Penny Stocks into two categories:

1. Highly Pumped Penny Stocks: These are the penny stocks you will see in the popular media.  Medical Marijuana, Cannabis, Solar Energy, Gold and Mining are all hot topics.  One of the biggest pumps of all time, was an energy company with hopes of building a device which converts static in the air into electricity.  A second in Canada converted rubber tires into energy.  Be wary of these kind of companies.  And don’t buy into the hype.  WallStreet.org recommends investors to stay away from these kind of companies.  You are gambling, and your chance of winning is low.

  • You can’t look at historical highs, and expect that the stock will retrace to its 52 week high: Why’s this?  Even if fundamentals stay the same (revenue, management, partnerships), the valuation of the company depends on how much demand is for the stock.  In a prior period, the stock could of been heavily promoted.  After that period of time, the promotion may have died down.  People who picked up shares at a cheap price, may try to sell it right away as the price crosses a few points above their buying price, and it may never reach the prior high that it did.

2. Unknown Thinly Traded Penny Stocks: These are the champions of penny stocks that we ask you to watch carefully.  We don’t recommend you to purchase these stocks outright (remember, WallStreet.org is not an accredited financial adviser, and we can never recommend for you to buy or sell any stocks in any company), but we would suggest you to place this stock on the watch list.

  • Doing well, just not many people are aware of it: This kind of company may have good fundamental, strong sales, good employees, but may not be getting the right kind of attention to increase its value.  We recommend you to watch these companies carefully.  Once you start to see volume, then you can accumulate shares, at 1/10th the amount of buy volume that’s occurring.  This is a safe amount so that if you need to sell, you won’t be stuck in a position where you can’t sell.  It’s likely that same volume could happen again to help relieve you of your shares.

These days the SEC is quickly freezing any stock company that is suspected of engaging in any insider manipulation or media promotion.

When Is The Right Time to Buy Penny Stocks?

1. 30 day volume average is greater than 52 weeks: This usually means there starts to be activity, and that people are trading the stock.  Remember your rule of thumb is to buy 1/10th the average amount of volume for the day in shares.

2. Increasing or Decreasing Price: This means that the stock is moving.  If the price is on a downward trend, we recommend the average cost method in order to catch the stock at a good price.  If the stock is $0.10, buy 10,000 shares for a total of $1000.  If the stock drops to $0.05, you can buy 20,000 shares for a total of $1000.  Now you have 30,000 shares with an average cost of $0.06.  If the stock rises above $0.06, you are back to gaining.

3. Significant News Development:  If there is news development such as land acquisition or new partnerships (in oil exploration ventures), new customer milestone reached (this is an excellent one), new executive, new research or technology developed, these are all news that indicates the company is going somewhere, and that the valuation of the company could go up.  We will try our best to integrate new news into our analysis in our premium articles section.