How to Find Valuable Penny Stocks When the Market Takes a Downturn 

Investing in penny stocks or blue chips during a large correction can be a scary thing. And while many blue chips have fallen in value in the past few weeks, many penny stocks have done the opposite. See, penny stocks don’t like to play by the same rules that blue chips do. And while a lot of the technical indicators are similar, the main benefit that penny stocks have is speculation. 

Yes, speculation affects blue chips, however it’s much more common to see massive price swings with a list of penny stocks than stocks above $5. Whether this is due to price or simple volatility, the fact remains. 

So, when the market turns bearish as certain economic impacts take their course, many investors turn to buying and selling penny stocks. These securities offer the chance for swift movement that can aid in the potential of making profits. 

How is the Bear Market Affecting Penny Stocks?

Right now, as a result of massive stimulus packages and zero-interest loans, we are seeing the highest rates of inflation since 2008. This was predicted by many economists over the past few months, and is naturally par for the course. 

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Additionally, it’s worth noting that bear markets may seem bad if you’re not an experienced trader, but the potential is always massive on the other side. So while the market may not look great today and in the past few weeks, many believe that it will come out even stronger.

And while nothing is truly guaranteed except death and taxes, the larger fluctuations that penny stocks make are a guarantee. So, when making a penny stock watchlist, what should investors look for during a bear market? 

Well, a lot is similar to forming a list of penny stocks to buy even when the market conditions are different. But, to go further in depth, let’s take a closer look at investing in penny stocks in a bear market. 

3 Tips and Tricks for Investing in Penny Stocks Right Now

  1. Understand Volatility Works Both Ways 
  2. Finding Penny Stocks With Underlying Value 
  3. Making a Profit With Penny Stocks 

1. Understanding Volatility Works Both Ways 

With penny stocks, volatility can mean either swift uptrends or even faster downtrends. And this should serve to excite you rather than to scare you away. To understand why this happens, we have to take a step back. 

With penny stocks, low prices mean that investors can buy or sell massive quantities of shares in a fast period of time. This is not as easy with stocks like Apple Inc. (NASDAQ: AAPL) or Tesla Inc. (NASDAQ: TSLA), because the prices of these securities are over $100 and $500 respectively. So unless you’re portfolio is ends with six zeros, you’re probably not going to buy 1000 shares of either of these. 

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However, the term penny stocks means applies to any stocks trading under $5. So let’s say a stock is at $0.50, buying 1000 shares would only cost you at $500. However, this increases volume exponentially, meaning that in a day, penny stocks can trade hands well into the high millions. This causes swift price movements, and thus, volatility. 

volatility penny stocks

And, one of the main factors that affects this is speculation. This includes news, filings, reports, and even rumors. These speculative aspects are usually the underlying cause of price movements with penny stocks.

And, because of all of the information mentioned above, this results in very large intraday swings. So, understanding this volatility means that investors can benefit when penny stocks go up, and can know when to avoid penny stocks if they are going down. 

2. Finding Penny Stocks With Underlying Value 

Finding penny stocks with underlying value can seem challenging at first. However, if we use the tools at our disposal, it can be much easier than previously imagined. The first tool and arguably the most important one is research.

Research is the backbone of any profitable portfolio. Most investors tend to start by using scanners such as the ones available on ThinkorSwim. This is a free trading software that allows for both simple and complex scanners to be created. And, it happens to be quite popular among investors. 

So, when looking for a penny stock to buy, there are a few things to consider. First and foremost is, what do its fundamentals look like? This includes looking at a balance sheet to see information such as outstanding debt, revenue, profitability and EPS. These financial data points can help to give you a complete picture of what a penny stock looks like. 

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value penny stocks

Second, investors need to consider the speculative factors that are impacting a penny stock. This is as mentioned above, news, rumors, recent reports, and essentially any information coming from the company. These are the factors that can cause a penny stock to jump or fall quickly in value. 

Lastly, investors need to consider the overall market or industry that a company works in. Will this industry grow in the short or long term? What is the demand like? These questions are important as they can help to guide you in making a decision. While this is not a be all end all list by any means, it should help to put you on the right track to finding penny stocks with underlying value. 

3. Making a Profit With Penny Stocks 

Making a profit with penny stocks is often easier said than done. But, there are a few tricks that all investors can learn. The most broad factor to consider is knowing how to enter and exit into positions. Before buying a penny stock, investors should set price targets. These should be realistic and achievable. 

making money with penny stocks

Next, investors need to understand how to take profit. The most common strategy involves exiting trades at incremental levels throughout your goal time period. For example, if your price target is a stock going from $1 to $2, you would sell 20% at $1.25, 20% at $1.50 and the remaining 60% at the $2 mark. This ensures that no matter what a stock does, every trade can be a potential winner. 

Keep in mind that these percentages are simply examples, and completely depend on your investing style. Also, it’s worth noting that if you are a long term investor, the most important thing to consider is what the company does.

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This ensures that you believe in its long term potential. If you can, getting a trading education can be extremely beneficial. This will likely teach you all of the technical indicators needed in finding valuable positions. 

Are Penny Stocks Worth It?

The short answer is that they can be. At the end of the day, it truly comes down to what type of investor you are and if you’re willing to put in the time. For most, day trading penny stocks is not realistic and will likely result in sizable losses.

However, if you are dedicated to research and education, making money with penny stocks can be easier than previously imagined. So what do you think? Are penny stocks worth it?


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