Do You Know How To Find The Best Penny Stocks?
I know this isn’t something as frequently discussed on major financial sites. But there’s something to be said about penny stocks. Before I just jump into the list of penny stocks, let’s go over some definitions.
First, the definition of a penny stock, according to the SEC is one that trades at or below $5 a share. Some traders may argue that the very definition is in the name. However, the Securities and Exchange Commission has set the general standard when it comes to the stock market.
Mumble the term, however, and you’ll likely be met with some disgust by the novice trader or even seasoned investor. You might also get flack from those who only trade blue-chips. The fact of the matter is this, people make money with penny stocks every day. So no matter how you feel about them, they produce returns and those returns can be meaningful.
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Obviously it comes with a few riders, right? First, your chances are much better trading a liquid penny stock than one that only trades a few thousand shares a day. Furthermore, it’s never a bad idea to buy penny stocks that have fully updated financial disclosures published. Dark or defunct stocks may breakout here and there. But the risk of holding a bag (holding onto a losing stock) is much greater due to the fact that the SEC typically frowns upon companies like these.
The Commission might even halt or suspend trading altogether. Guess what, if the stock gets halted or suspended, you can’t sell or trade it at all. The term “shell stock” gets thrown around a lot in these cases. Read More on Frequently Asked Questions About Low-Priced Equities.
Can You Make Money With Penny Stocks?
At the end of the day, as a trader, you need to know the difference between a few types of stocks. First, is the penny stock you’re looking at just for a quick flip as a trade or are you looking to invest in a company? This is a very important decision to get correct.
If you plan on investing in penny stocks, know that you could be in for a highly volatile, speculative ride. An investment approach may be a bit harder to stomach than simply flipping the penny stock when it sporadically moves. If you plan on trading penny stocks that may otherwise be an investment, you may be waiting a long time to exit the trade with a meaningful gain that’s in line with other penny stock trades.
For example, let’s say you bought into a highly liquid biotech penny stock that continues numerous trials over the course of years. That stock may climb 300% or more from start to finish. But if you weren’t planning on investing and only wanted to trade that penny stock, you might encounter some missed opportunities along the way.
Here’s my point: There are penny stocks and then there are “cheap stocks”. The difference between the two is that while cheap stocks may not immediately produce huge gains, they typically take some time to climb. But in the long run, they may yield a huge windfall that involves less time sweating in front of your computer screen. The generic, “penny stock” on the other hand, could be better suited for swing trading and day trading.
These Penny Stocks Were Just “Cheap Stocks”
So, now we have a basis for this next part. What are some examples of “cheap stocks” that just happened to fall under the category of penny stocks? For starters, consider the industry that a given stock is in. For industries that see traders buying things like gold stocks or biotech stocks, the long-term approach may be a better option in some cases as opposed to “cutting edge” tech.
Take Axsome Therapeutics (AXSM), for example. This company’s stock trades at $63 per share right now and saw highs of nearly$110 at the end of December. But on January 2 of last year, shares were trading below $3. Was it considered a penny stock? That answer, of course, is yes based on our simple definitions from earlier.
But it was obviously more of a “cheap stock” as we’ve come to see. What initially sent the stock soaring was when it reached its primary endpoint in a Phase 2 Trial for Major Depressive Disorder. For investors who read the details on this company, the story read more like one of a true biotech company than just a biotech penny stock capitalizing on the latest trends.
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Following more upbeat trial data and nods from the FDA, shares managed to reach roughly $50 in mid-December. But then the biggest catalyst happened which is what got it to where it’s at today. It achieved its primary endpoint in the Phase 3 trial for Major Depressive Disorder. This is when shares gapped up past $80 a share and even with the announcement of a $200 million raise, didn’t slow down until hitting highs of $109.94 on December 30, 2019.
Are Penny Stocks Right For You?
But this isn’t an isolated incident and surely, those who invested a little bit of money last January are sitting on a sizeable gain right now. Constellation Pharmaceuticals (CNST) is another example of a cheap stock that just so happened to be a penny stock. At the start of 2019, the stock traded around $4 a share. It’s gone as high as $59.49 and currently trades just above $30.
Unlike Axsome, Constellation had a slight jump to highs of around $14 and ended up pulling back to $6 before its real move. Bain Capital Life Sciences upped its stake in the firm around mid-August. This came just as the company was set to present at the ASH conference in December.
Notably, the company released its Q3 financial results, which also showed favorable results from its MANIFEST data from the CPI-0610 therapy or myelofibrosis. After this, shares jumped to highs of $59.49 within about a month to follow. Even though it wasn’t the AXSM-type move, it was still worth a little over 1,372%.
These are just a few examples of penny stocks or cheap stocks that hit it big. This isn’t to say that penny stocks aren’t worth it, however, you should be picky with the ones you choose to invest in. On an almost daily basis, there are micro-cap stocks that produce 100% or more in gains. But for those of us who aren’t day traders, it’s important to find companies that have true, intrinsic value or at the very least, have meaningful product pipelines.
Famous Companies Traded as Penny Stocks
Also, don’t forget that some of the most notable companies in the world are considered penny stocks. Was Amazon (AMZN) ever a penny stock? No, unlike popular opinion or click-bait might suggest, Amazon was never considered a penny stock. But that doesn’t mean other notable businesses weren’t or aren’t in the range of penny stocks.
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Gamestop (GME), Pier1 (PIR), GoPro (GPRO), Macy’s (M), and even FannieMae (FNMA) can all be considered as penny stocks. Other companies like FitBit (FIT), Canopy Growth (CGC), and even General Motors (GM) were all once considered penny stocks. Even penny stock IPOs can turn out to be big opportunities to take advantage of cheap share prices.
Late last year saw shares of LMP Automotive Holdings (LMPX) run from an IPO of around $5 to a high of $49. If you compare some of these to what you think of when you hear the term “penny stock,” it might make you think twice before judging a company based solely on its share price.
So when it comes to buying cheap stocks, make sure you know what you’re buying before you throw your money at just “any” stock trading under $5. Are you looking at a penny stock to trade or a cheap/undervalued stock to invest in?
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