Have you ever been curious about penny stocks or how to make money with them? If you’ve seen any stock market game or movie about trading, I’m sure the topic has piqued your interest. It seems easy, right?
Just load up some cash into some mobile brokerage account, and you can start making money with penny stocks. They’re only cheap stocks, right? How hard could it be?
The rise of meme stocks like AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME) did something interesting to the stock market; it brought a whole new type of “investor” into the fold. The idea of “buy and hold” was thrown out the window in exchange for capitalizing on short squeezes and breakout stocks. It also put penny stocks at the center of the spotlight. But in this case, it wasn’t about how these cheap stocks could jump in a single day; it was the potential of a much bigger move.
Let’s look at the AMC and GME examples.
GME Stock Explodes 16,967%
The GameStop saga began much earlier than 2021. In fact, GME stock was a frequent mention on PennyStocks.com over the last few years. One of the most significant developments came when “Big Short” investor Michael Burry actually got behind GameStop. Jumping ahead to the meme stock explosion and the sub-$5 GME was now trading at a modest $20. In a movement more akin to the movie, The 300, traders locked down during the pandemic found a common goal: fight against hedge funds that had depressed certain “underdogs” for so long. Ultimately, GME stock would explode to highs of $483 in a move of nearly 17,000% in less than a year.
AMC Stock Surges 3,700%
Thanks to the attention that GME stock received, the new “Ape Army” was on the hunt for the next heavily shorted, all-but-forgotten penny stock to buy. In early 2021, AMC stock was, by all accounts, considered a penny stock. It met the standard sub-$5 definition and was relatively illiquid. The underlying company had also taken its licks in the market. That was due to a floundering business at the time, thanks to COVID restrictions.
But some saw the potential in the company, including our writers. We pointed AMC out in November 2020 as one of the top epicenter penny stocks to watch before the new year. Fast-forward and AMC stock became one of the leading meme stocks at the center of interest. This was for thousands of traders taking their first step into the stock market. Shares of AMC stock surged from under $2 to highs of over $72 in one of the most epic rallies in recent history.
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So, if AMC stock theoretically turned $1,000 into $37,000 and GME stock took the same $1,000 and made it nearly $170,000, why aren’t you making money with penny stocks?
1. You’re Trying To Find Duplicates
So many new traders started by taking advantage of the moves in AMC and GME stock. It was a global phenomenon that brought in all the appeal, including scandal, money, & a David and Goliath type storyline. When hundreds of thousands or even millions of investors focus on a single issuer, these moves can happen. But it’s a rare occurrence. Sure, you have your groups of traders agreeing on a similar trade idea at times. But what we saw happen with the Ape movement was an outlier.
One of the first reasons that new traders aren’t making money with penny stocks is that they’re trying to find “the next GME” or “the next AMC” instead of learning how to trade. The fact is, there are plenty of penny stocks that explode 50%, 100%, or even over 300% within a matter of days or weeks. But all-too-many new traders see a position up 300% and think, “Well, this is it. THIS is the next GME; I found it,” only to see share prices implode soon after. The vast majority of penny stocks are young companies or ones looking to get on their feet. They are priced lower for various reasons.
The Solution: As a trader, understanding how to set profit targets, stop losses, and manage risk is the first step in removing this issue from your trading strategy. Have a plan, execute the plan, and have backstops in place to protect your capital if things don’t go as planned.
2. Catching The “Whole Move” In Penny Stocks
Like a good piece of fruit you’re trying to juice, you want to get every drop out of it. Rarely does this happen. There’s always some liquid left in the rind. Like fruit juice, catching the entire move in penny stocks tends to result in more failed trades than winning ones. At most, attempting to “top tick” your sale or “bottom tick” your entry will force you to deviate from your original plan.
Sure, technically, the GME and AMC stock moves were between$3,700 and nearly $17,000 from low to high on the charts. But the chances of catching the entire move are low. Another reason why you might not be making money with penny stocks is you hold too long, hoping to see the whole move.
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The Solution: Clearly outline your trading game plan ahead of time. Set your price targets for selling shares, set your stop-losses, and, most importantly, STICK TO THE PLAN! Not catching the entire move is fine as long as you remember why you’re trading in the first place: to make money and repeat the process. At the end of the day, if you “sell too early,” as long as the underlying trend is strong, there should be more opportunities to re-enter a trade if you choose.
3. Letting Emotions Dictate Your Strategy
We’re talking about penny stocks here. You can buy them for as little as $0.0001 per share or as much as $5 if you stick to the definition of penny stocks. In all cases, small moves in price equate to much more substantial percentage changes than higher-priced stocks.
So it’s not hard to imagine that if you’re up 30% on a penny stock, “just a few more pennies” could put you up 40% or 50%. When emotions dictate your strategy and force you to deviate from your original plan, that’s when things can go south. Holding out for another 10%, in this example, could end up costing you much more based on how volatile stocks are. Look at a recent example of how volatility can quickly turn a winning trade into a break-even or losing trade.
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In late-2021, shares of Remark Holdings (NASDAQ: MARK) exploded from under $1 to over $6 within a 2-day timeframe. But, by day #3, MARK stock was already back at $2. Letting emotions take over, thinking “this is the next GME,” likely caused more losses than gains. The traders who made the most money from MARK stock traded according to their original plan. Was the trend strong? Ultimately, the answer to that question is “no,” but those holding out, thinking $6.70 wasn’t “the top yet,” more than likely found out exactly why emotion has no place in trading.
You even had former penny stocks like Novavax (NASDAQ: NVAX) and FuelCell Energy (NASDAQ: FCEL) go on epic rallies but ultimately plummet from their record highs.
The Solution: STICK TO YOUR PLAN! Most of the time, a clear, defined strategy will yield more consistent results than “a gut feeling.” Will there be outliers? Definitely, and you’ve got to be alright knowing that you might catch the entire move in a penny stock. Again, if a trend is truly strong, it will give multiple opportunities to profit.
4. You Don’t Know How To Trade Penny Stocks (or other stocks)
Let’s face it if you saw the moves that AMC stock and GME stock made, your outlook on trading is much different from those who’ve been in the market for years. These massive breakouts brought a different mentality to the market that was more about “betting” on winning trades than identifying them. If that sounds like you, that’s ok (for now). The market doesn’t have to be one big bet; you can become consistently profitable and don’t need to have an AMC-type move to do it.
The Solution: Learn the basics, understand technical analysis, learn how different types of news impacts the market, and know what various SEC filings mean and how to use them. There are many ways to make money with penny stocks, just like there are plenty of ways to do other professions. But the first step is learning how to do so the right way.
Take a step back and learn. Believe it or not, trading can be a full-time profession and is one for thousands of market participants. Like any profession, learning basic and advanced techniques is key to making it to the top of your game. Getting lucky is one thing but becoming consistent in your trading is another; luck doesn’t have a place.
Should You Trade Penny Stocks?
That depends on your goals and your risk tolerance. Penny stocks are not suitable for everyone, but they can be a great way to make money if you’re willing to take on the risks. Do your research and understand the risks before you trade penny stocks. And never invest more than you can afford to lose. Penny stocks are risky, but they can be a great way to make money if you know what you’re doing.
If you are interested in learning more about penny stocks and the stock market as a whole, then you need to check out True Trading Group, the fastest growing & highest-rated online premium educational platform available today.
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