High Risk & High Reward Penny Stocks Can Be Incredibly Profitable
In this article, we’re going to demystify a few things and discuss what penny stocks are, why they continue presenting big opportunities in 2021 & why they aren’t something to avoid if you can handle risk. With the broader market pullback, it’s important now more than ever to take a different perspective on markets. The bottom line is that it’s easy to make money in a bull market. But when it comes to a more volatile stock market or even a bear market, you should know how to navigate the waters.
What Are Penny Stocks?
According to the Securities & Exchange Commission’s definition of penny stocks, these are shares of companies trading for less than $5 per share. While it might sound simple on the surface, making money with these cheap stocks entails much more than knowing the definition. As with all things worthwhile, day trading is a skill that takes time to develop. The fact that it’s so easy to open an app like Robinhood, fund an account, and begin trading has painted the picture that trading is easy. I mean, why wouldn’t it be easy based on how simple it is to gain access to the stock market?
But herein lies the details of “mystery #1” – it’s easy to make money with penny stocks
Penny Stock Myth #1: Making Money With Penny Stocks Is Easy
To make money with penny stocks, you should understand how it’s done. It’s buying low and selling high, right? While this is a basic approach, it’s correct. However, the real strategy comes into play when deciding how to know out when stocks are low and understand when it’s time to take profit.
Just buying a random stock because you saw it on Reddit or Facebook poses more risks than anything. You listened to a random account and decided to buy but now what? When do you sell, how do you sell, do you sell everything or just a piece? It’s important to understand how to find penny stocks to buy and have a strategy in place to take profits or preserve capital.
So instead of banking on the idea that making money with penny stocks is easy, focus on things like how to day trade instead. Learn the fundamentals first. This includes learning how to conduct proper research, understanding the basics of technical analysis, and, one of the most important things, getting a handle on trading psychology. As you can quickly see, making money with penny stocks has much more involved than simply finding a combination of letters and selecting “buy” with the hope of making a profit.
The fact is, the stock market isn’t a giant casino and penny stocks aren’t lottery tickets. Once you’ve got a sound education under your belt, it becomes easier to consistently make money with penny stocks. Again, it all starts with getting the proper education. Whether it’s self-study or learning from professional traders, learning the ropes of how to trade will ultimately lead you to the methods of how to make money; not the other way around.
Penny Stock Myth #2: All Penny Stocks Go Up Hundreds of Percentage Points
It’s easy to think that all penny stocks are built for these gigantic gains. But the fact of the matter is, they aren’t. There are plenty of penny stocks trading under $5 with the underlying companies being big, multi-national organizations. With that typically comes much larger share structures with millions and even billions of shares outstanding.
That translates to a much slower churn in most cases. Take, for instance, Ambev (NYSE: ABEV). This is the Latin American arm of Anheuser-Busch, but it’s also a penny stock since it trades below $5. Needless to say, this isn’t a small company by any stretch. The market cap is over $40 billion, and over 15.7 billion shares are outstanding.
Since this is the case, ABEV rarely experiences those big 100%+ moves like some of the other penny stocks I’m sure you’ve seen. But it is one of the few penny stocks offering a dividend and, when it does climb, ABEV stock has moved as much as 50% within a few weeks. It isn’t 100%+ in a day, but it is also a less volatile penny stock.
Trading Volatile Penny Stocks
When it comes to the big movers of the day, they might breakout 100% but they can and usually come back significantly as well. Take, for instance, Xtant Medical Holdings (NYSE: XTNT) on February 26th. Shares of the penny stock climbed from $2.01 to highs of $4.49 within minutes. Shortly after reaching the $4.49 high, XTNT stock came crashing back down to around $2.75, again within a matter of minutes. Then you’ve got former penny stocks like GameStop (NYSE: GME), Koss Corp. (NASDAQ: KOSS), and even Workhorse Group (NASDAQ: WKHS). All have dramatically exploded in price but have also dropped hard, recently.
Is there still potential for it to rebound again? Maybe, but for a novice trader not educated on high-volatility trading, it may do more harm than good by trying to “jump in” the trade. Again, education is key. Not just understanding how to buy or sell but knowing the right strategy for the right trade. Professionals approach a stock like XTNT much differently than they do ABEV. But without experience and know-how, novice traders may not quite get that.
Penny Stock Myth #3: You Should Avoid Penny Stocks
Anyone telling you to avoid penny stocks has either not made money with them on their own, or they believe the negative sentiment stemming from movies like The Wolf Of Wall Street or Boiler Room. The fact of the matter is that if you know how to day trade, swing trade, or invest in penny stocks, there’s no reason to avoid them. Just like any other investment type, there’s risk involved. When it comes to penny stocks, however, the reward can far outweigh those risks.
Apps like Robinhood and Webull, along with the slew of desktop/phone app platforms from TDAmeritrade, ETrade, and others, have made it easy to access the markets. What it hasn’t done is train the millions of new traders on how to make money in the market. So most have chosen trial by fire, which isn’t the best way to “learn.” The same people telling you to avoid penny stocks have likely “tried” trading and failed.
But I can say that trading is just like anything else worthwhile. You need to learn the ropes, you need to practice, and you need to continue honing your skills. The dental hygienist cleaning your teeth didn’t grab a dental pick and start going at it with patients’ teeth. That person learned first, practiced second, and then applied those lessons for a successful outcome. The same example can be said for any professional in their field.
So, should you avoid penny stocks? In my opinion, absolutely not. But, if you are new to trading, your first step is getting thee right education and learn the ropes.