What’s Different About Penny Stocks This Year Vs. Years Prior
2021 is a year unlike any other for both penny stocks and blue chips. If you’re reading this, you likely have spent the last year and a half parked on a couch waiting for the pandemic to end.
And with vaccine rates higher than ever, we are only just seeing the light at the end of the tunnel. Outside of the pandemic, 2021 has been a banner year for penny stocks. If we add in factors such as the influence of social media, new trading platforms, and major external events at play, we see that volatility has never been higher.
Yes, volume and the market have both been low in the past two months. But before this, we saw many penny stocks and blue chips hit all-time highs. We can’t expect these gains to happen forever right? This natural ebb and flow is what makes investing interesting. And, it gives the potential to make big gains (and losses), no matter what the market is doing.
If you’re a pro-trader, you may know how to use these factors to your advantage, but if you’re new to trading, they could help you to think outside of the box. Because penny stocks are highly speculative, knowing what’s going on in the world will always be your best chance at staying ahead.
No matter what type of trade you are, thoroughly understanding what aspects are at play in the market, and how they may affect the trajectory of individual stocks or industries as a whole, is key. With all of this in mind, let’s take a look at why investing in penny stocks in 2021 is unlike any other time.
3 Things That Are Affecting Penny Stocks Right Now
- The Influence of Social Media on Penny Stocks
- The Democratization of Trading Platforms
- Extraordinary Factors At Play in 2021
Social media has become one of the largest influences on the trajectory of penny stocks. While this was not the case a few years ago, this year, it has become commonplace. The most popular social media sites where penny stocks are discussed remain Reddit and Twitter. Aptly named Reddit penny stocks; are the talk of the town, and often result in large double or even triple-digit percentage gains.
We’ve seen this with the likes of GameStop Corp. (NYSE: GME) and more recently, AMC Entertainment Holdings Inc. (NYSE: AMC). To understand this, we have to consider that there are more traders now than ever before (we’ll get into this later). And because of this, more retail traders are coming together to invest collectively. This has resulted in the terms Reddit penny stocks (mentioned above), and now, meme penny stocks. Both of these apply to highly talked about stocks on social media.
One thing to keep in mind is that when a stock becomes one of these, it often is subject to greater volatility than without it. This makes sense as volume climbs while prices either increase or decrease dramatically. To stay ahead of the game, investors should research which penny stocks are being discussed on these platforms. This is the best way to understand which companies may be your best options. But overall, remember that the influence of social media on penny stocks is likely not going anywhere anytime soon.
The Democratization of Trading Platforms
The democratization of trading platforms is not something that is new in 2021, but it is a process that has rapidly come to fruition during the past year. While Robinhood has been around since mid-2013, it only became a major brokerage for traders in the past few years. And, during that time, it still had to compete to find legitimacy against major firms like E-Trade and others.
But, after doing so successfully, and being one of the first to offer commission-free trades to all, Robinhood became commonplace. Flash forward to 2020/2021, retail traders quickly rose to fame. And this culminated with the GME trading mentioned above. Traders had never witnessed an event like this, and because of that, non-institutional investors quickly earned themselves a place in the stock market.
Because Robinhood is so easy to use, just about anyone with access to a bank account can trade. This has opened the market up substantially, adding billions in capital throughout. But, it also comes with greater volatility for both penny stocks and blue chips. Again, we have to refer back to the GME trade. This was the first time that a blue-chip had been affected so heavily by traders coming together.
While penny stocks are known to be volatile, blue chips are typically less so. Additionally, we see this with Tesla Inc. (NASDAQ: TSLA) and others. While this should not serve to scare you out of investing, it should help to show that the market is changing. With that in mind, the democratization of trading is now in full effect.
Extraordinary Factors At Play in 2021
2021 has been a banner year for uncertainty. It’s obvious that Covid has had a major effect on the stock market. When Covid began back in early 2020, the market took a big downturn. However, a few months later, the market picked back up quickly. And for the six months or so following that period, both penny stocks and blue chips hit all-time highs. Following that time frame up to now, the market has been extremely volatile and low-volume.
And for the majority of the time, trends have been mostly negative. But, moving into the Summer, investors are excited about the potential of new positive trends. Additionally, we have to account for the effect of retail traders such as those on Reddit, Twitter, and Robinhood. Penny stocks on Reddit and Robinhood have become extremely popular in the past few months.
Following the GameStop Corp. (NYSE: GME) rally a few months ago, we witnessed a paradigm shift in the stock market. This shift occurred when retail traders discovered their power to have an influence on the market. While this is not a concern, it is something to consider for investors of all types. Right now however, Covid and social media are two of the largest impacting factors on both the stock market at large and penny stocks in specific. With that in mind, investors should keep these two things in mind moving forward.
Is Investing in Penny Stocks in 2021 For You?
Investing in penny stocks is all about understanding what type of investor you are. Are you looking for a long-term stock to hold? Or are you looking to make short-term gains? These questions alone should help you to decide which penny stocks are right for you.
At the end of the day, it also takes a proper trading education and a commitment to understanding the ebbs and flows of the market. With all of this in mind, is investing in penny stocks in 2021 for you?