Traders Are Flocking To Penny Stocks In Droves

Penny stocks are shining bright right now. It doesn’t matter the day of the week or the stock price so long as it’s cheap. Every week we see these low-priced stocks dominating the top 10 most active list. On Tuesday, 7 out of the 10 most active stocks on the NYSE and NASDAQ were penny stocks. That hasn’t changed on Wednesday either.

This has been a key theme in January, with new traders flocking to cheap stocks. Are they worth the time? Traders seem to think so, and it doesn’t look like they’re shying away from volatile stocks so far. As of the lunch hour, 8 of the 10 most active stocks on the NYSE and Nasdaq were penny stocks. They had collectively traded more than 1 billion shares.

Most Active Penny Stocks On January 20th By Volume (NYSE/NASDAQ)

We also saw incredible levels of trading volume in many stocks under 10 cents. While these were OTC penny stocks and open to more scrutiny, we aren’t talking about a few hundred thousand dollars of volume, but tens of millions:

Please note that 2 of these 3 companies are shown as delinquent in SEC Reporting by OTCMarkets Group. But the fact that just these three stocks have collectively traded more than 2 billion shares before the afternoon session shows how active traders have become in lower-priced equities. Even if they’re trading between 2 and 3 cents, that’s still more than $40 million in trading dollar volume.

What Are Penny Stocks?

All of this excitement is great, but maybe you’re just getting your feet wet because of it. You may be asking, “What are penny stocks?”

Penny stocks are shares of companies that trade for less than $5. In light of the massive sell-off last year, plenty of higher-priced shares became penny stocks. Many of them had gone on to make massive rallies into year-end. If you look at some of the top penny stocks for 2020, it wasn’t uncommon to see percentage increases of 3,000% or more.

Not all penny stocks go on to see such explosive gains. But, it hasn’t been unusual to see some of the stocks under $5 jump several hundred percentage points within a single day. 

Are Penny Stocks Right For You?

carole baskin zomedica

When it comes to finding penny stocks to buy, you’ve got to be careful. Emotions are riding high, and the market’s speculative nature has created more risk in general. With penny stocks, that speculation can stem from many different places.

As we saw earlier this month, the simple mention of Zomedica (NYSE: ZOM) and its TRUFORMA diagnostic platform by Tiger King’s Carole Baskin sparked a massive move in the penny stock. It would come to light that this was a video from the Cameo platform, which is known for giving customers the ability to pay celebrities for shout outs. The short video helped spark a near-500% move in the penny stock. Since that surge, shares of ZOM have come down significantly from their January highs.

Speculation Plays A Big Role In Penny Stocks

It isn’t just short-form videos that have sparked big moves for penny stocks. We discussed speculation. Even the smallest glimmer of a catalyst can ignite momentum. Earlier this month, we saw Elon Musk at the center of a big breakout in a defunct company’s cheap shares. Tesla (NASDAQ: TSLA) CEO Elon Musk pushed his followers on Twitter to “use Signal.”

Elon Musk Signal penny stock tweet

This was in response to the growing interest in getting away from mainstream messaging platforms like WeChat and iMessage. He was referencing the encrypted messaging app “Signal.” Traders took that as the go-ahead to buy shares of a company with “Signal” in its name. In this case, Signal Advance Inc. (OTC: SIGL) became the center of attention.

While Signal Advance and the Signal App have nothing to do with each other, traders have flocked to the stock in droves. The resulting surge spiked Signal Advance shares from around 60 cents on the date of Musk’s tweet to highs of $70.85. In 3 trading sessions, the SIGL stock price climbed as much as 11,708%. Was money made by some, sure, but for the unwitting new trader, it was likely a valuable lesson in not believing in the hype without researching first.

This is just one of the risks you face when trading penny stocks. The rate at which these stocks increase and decrease isn’t easily navigated by the novice investor. So, before you buy, it’s crucial to understand how to trade these very volatile names. Are penny stocks right for you? To answer that, decide if you can handle price fluctuations like this.

Is The Market Too Hot To Handle Right Now?

We see uncapped market exuberance. When you see people trading no-name stocks with sparse filing history, that one sign that emotions are a much more significant factor. If you’re a novice trader, this is very important to keep in mind. It’s the type of thing that causes new traders to jump into a stock that’s running, only to be left holding the bag because they didn’t know how to trade a volatile stock.

Cromwell Coulson, the president of OTC Markets, told Bloomberg

“I would be very careful. We’re definitely in a market where my cleaning lady is asking me ‘Do I like solar companies?’ Because she bought a solar company that’s a Nasdaq stock through Robinhood. And it’s tripled.”

Whether or not the market is “too hot” is irrelevant. I think the better question right now is, do you know how to trade during volatile times like this? If the answer is no, it may be time to start learning how to trade first.

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