Penny stocks are where a lot of new traders start their career. Tempting day traders with the prospect of significant financial gains and a low cost of entry.
Stories of stocks gaining of over 5,000% in just a short time add to their appeal, and advances in trading technologies make it easier than ever to jump into the market.
But what are they and can you get rich off penny stocks?
What are penny stocks?
According to the U.S. Securities and Exchange Commission, a penny stock is any stock that trades at or below $5 per share. These stocks are often traded in less regulated over-the-counter (OTC) or “pink sheets” markets, but also trade on listed exchanges like the NYSE and NASDAQ.
Penny stocks are generally floated by tiny companies that have low market capitalizations.
In most cases, these companies are usually in industries that are perceived by some market players as carrying strong growth potential such as precious-metals mining, medical marijuana, fuel-cell development, and biotechnology.
Why penny stocks are viewed as a way to get rich
Penny stocks are viewed as a way to get rich because they tend to have high percentage returns. You can’t deny it — the math on owning these stocks is psychologically attractive, particularly for inexperienced traders.
For example, imagine that you have $1,000.
If you decide to buy one stock with all $1,000. You are weighing two different choices – you can purchase 10 shares of a stock that is trading for $100 per share, or you can buy 1,000 shares of a penny stock trading for $1 per share.
If you purchase 10 shares of the stock that is priced at $100 and the price soars by $1 per share, you will have earned a profit of only $10.
If you choose the penny stock and the price jumps to $1 per share, you investment will have doubled.
This thinking is deceptively appealing and can wreck otherwise logical and sane individuals.
You look at the $100 stock and imagine your penny stock getting there. If it does, your 1,000 shares are worth $100,000.
This simple example makes the appeal of penny stocks quickly evident.
Risks involved with trading penny stocks
Although penny stocks offer trading opportunities, day traders have to realize that reaching their ambitious goals will require more effort and probably take much longer than initially anticipated.
In addition, penny stocks are considered tobe more risky than larger stocks because of their lower levels of regulation and wild price fluctuations.
By buying penny stocks, you can own far more shares than you would otherwise be able to with regular stocks. In addition, penny stocks can double, triple, or gain more value quite quickly since they are lowly priced.
However, it is also possible for these stocks to suffer dramatic losses in a very short period.
Penny Stock Example
While the company that owns the $100 stock is unlikely to be pushed out of business anytime soon, the one that owns the $1 stock certainly could. If the larger stock falls by a dollar, that is only going to cost you $10 and keep holding it in hopes that it will rise again as time goes by.
If the penny stock you bought falls by a dollar, it is completelywipedout and you have lost all $1,000.
Penny stocks have less regulatory oversight compared to those traded on the formal exchanges, and their cheap prices mean that small price moves can quickly add up to massive percentage moves.
In addition, penny stocks are very thinly traded (illiquid). This means very few shares (low float) are traded/transacted daily compared to stocks of larger companies.This concept is called liquidity.
Most professional traders with big account sizes are also barred from trading these stocks since they are highly speculative.
Moreover, penny stocks are often prime hunting grounds for “pump and dump” schemes and scammers. Some scammers tout a stock, only to unload shares into a thinly traded market, profiting in the process but leaving other traders with losses.
Penny stocks are extremely risky, and this is an important thing that every day trader ought to keep in mind.
That is not to say these stocks can never be traded wisely, but you need to exercise caution when trading penny stocks.
Can penny stocks make you rich?
Although penny stocks have some great attributes, they are not right for everyone. These stocks truly can turn a small amount of capital into a huge sum of money pretty fast, but can just as quickly wipe that investment out.
It seems appealing that you can purchase shares of a company for a very small price, and if it just rockets to the same price as Amazon one day, you become filthy rich.
However, you need to remember that a cheap price mostly implies that the company comes with very high risk and a big chance it will not become profitable or exist in a few years.
Simply put, these stocks are cheap for a reason.
Set realistic expectations
Have you got realistic expectations when trading penny stocks or are you shooting for unrealistic profit targets?
As a day trader, your job is not to build a lasting relationship with these stocks; it is simply to trade them for a profit by setting realistic expectations. Remember that day trading involves buying and selling stocks or financial securities all within the same day.
In other words, you will close out all positions by the end of the day.
Therefore, it is important to set realistic expectations and choose the right penny stocks. Several factors can influence your choice of choice of penny stocks, noteworthy among them quarterly earnings reports, media announcements, press releases, FDA approvals, and more.
The key thing to keep in mind about penny stocks trading is that it’s all about selecting the right ones and having realistic expectations.
Utilizing fundamental and technical analysis tools, using stocks scanners, and scanning press releases for valuable news can also help.
In addition, look out for important patterns including the likes of: double bottom patterns, Fibonacci retracements, flat top breakouts, bull flag breakouts, golden cross patterns, and flag chart patterns.
You can find these patterns in our Technical Analysis Guide.
Bottom Line
Penny stocks may seem cheap compared to stocks of popular companies like Apple (NASDAQ: AAPL) or Tesla (NASDAQ: TSLA), but often they are much more expensive, despite their cheaper price tag.
They are among the most volatile stocks in the market, so you may pay a much higher price than you initially anticipated, including potentially losing all of your money.
So, make informed trades and read as much as possible before day trading these stocks.
Most importantly, you have to set realistic expectationsabout you potential trading returns, and keep in mind that each unit of profit is accompanied by a unit of risk.
FAQs
Can you make a lot of money trading penny stocks? ›
Do penny stocks really make money? Yes, but they can also lose a lot of money. Penny stocks are a risky investment, but there are some ways to lower the risk and put yourself in a position for money-making penny stock trading.
Is trading penny stocks worth it? ›Penny stocks are risky and there's not a lot of information available on most stocks that trade over the counter. With so many alternatives to penny stocks that allow investors to start investing with $5 or less and still enjoy solid historical returns, there's really no reason to see penny stocks as a wise investment.
Can you make a living day trading penny stocks? ›Most financial experts tell you that you can't become rich day trading penny stocks. Well, that's true. If you use stocks the way they use stocks. The way most of the investing public use stocks is the "buy and hold" method of long-term investing.
Which trading platform is best for penny stocks? ›...
The best penny stock brokers in our analysis include the following:
- Fidelity.
- Firstrade.
- TradeStation.
- TD Ameritrade.
- E*TRADE.
| Fastest Growing Penny Stocks | ||
|---|---|---|
| Price ($) | Revenue Growth (%) | |
| Ring Energy Inc. (REI) | 2.19 | 91.2 |
| Conduent Inc. (CNDT) | 3.89 | -5.9 |
| Rocket Lab USA Inc. (RKLB) | 3.90 | 1,090 |
Do penny stocks ever "go big"? Penny stocks can certainly "go big," but the problem is these parabolic moves are usually short-lived. Penny stocks frequently double or triple in price in short periods, but these companies usually have a very bleak 5-year chart.
How long should you hold penny stocks? ›Experts Might Hold The Stock For 6 Minutes Or Up To 6 Months: If you are a day trader, you may be buying and selling stocks at an average of every five or 10 minutes. But, investors who are looking for long-term plays and do not want to trade much off momentum, might hold penny stocks for as long as six months.
Is it difficult to sell penny stocks? ›Because penny stocks trade in low volumes, it can be difficult to buy or sell large quantities of the stock without significantly impacting the price. This can make it difficult to exit your investment if you need to, which is why it's important to only invest a small portion of your portfolio in penny stocks.
How much should I trade penny stocks for? ›How much money do you need to start day trading penny stocks? Penny stocks are subject to all the same trading rules as regular stocks. That means, to regularly day trade, you need at least $25,000 in your account. Otherwise, you're limited to three day trades per week.
Are penny stocks good for beginners? ›Penny stocks have high volatility. This is a fact that concerns many investors. With such volatility, it is possible to lose all of the money that you have invested in penny stocks. The main reason behind this is that penny stocks whose share price is very minimal have experienced a major downfall.
What are the safest penny stocks to buy? ›
- Vodafone Idea.
- Suzlon Energy.
- Alok Industries.
- Hemang Resources.
- Indian Overseas Bank.
- Open a brokerage account.
- Understand you're probably a speculator, not an investor.
- Start small and diversify.
- Beware penny stock scams.
- Check the volume.
- Be prepared to research.
As of January 6, Zevia PBC (NYSE:ZVIA) trades at $4.64 a share and is one of the penny stocks that has the potential to make you a millionaire. At the end of Q3 2022, 3 hedge funds held stakes in Zevia PBC (NYSE:ZVIA). The total value of these stakes amounted to $1.39 million.
Can you live off just trading stocks? ›The answer is yes. There are half a million people in India day trading for a living. Do you feel day trading is a way to make easy money? Or, you may think it does not need as much work as a regular job.
Do you need 25k to day trade penny stocks? ›If a customer's account falls below the $25,000 requirement, the customer will not be permitted to day trade until the customer deposits cash or securities into the account to restore the account to the $25,000 minimum equity level.
What is the hottest penny stock? ›- OPEN2.75-0.05% Opendoor Technologies Inc.
- NKLA2.780.05% Nikola Corporation.
- BBAI4.991.39% BigBear.ai Holdings, Inc.
- WISH0.78-0.00% ContextLogic Inc.
- FFIE1.060.06% Faraday Future Intelligent Electric Inc.
- BZFD2.160.07% BuzzFeed, Inc.
- EEENF0.010.00% 88 Energy Limited.
- MGTA0.810.25%
#1 Hemang Resources
Hemang Resources stands as the top performing penny stock of 2022, having surged a massive 1,929% between January 2022 and December 2022. From trading at less than Rs 4 at the start of 2022, the stock currently trades at Rs 66 having a 52-week high of Rs 81 touched on 31 October 2022.
South Indian Bank is a solid candidate in the penny stocks space that may see a revival of its fortunes in 2023. This is mainly due to two reasons: One, the private sector bank has been able to reduce its net non-performing assets (NPAs) to 2.51% as on September, 2022 compared to 3.85% on a year-on-year basis.
Why do most penny stocks fail? ›Penny stocks are high-risk securities with small market capitalizations that trade for a low price outside major market exchanges. A lack of history and information, as well as low liquidity, make penny stocks riskier. Look out for scams involving penny stocks that want to separate you from your money.
How often do penny stocks succeed? ›Penny stocks and OTC stocks have an average negative annual return of 24%. Over 90% of penny stocks fail. Penny stocks – those that trade for low prices, often less than a dollar per share – are dangerous.
How long can a penny stock stay under a dollar? ›
In order to regain compliance with the minimum bid price requirement, a security must have a closing bid price of $1.00 or more for 10 consecutive business days.
How much can you make day trading penny stocks? ›One allure of penny stocks is you can make 20% or 30% in a few days. If you make that kind of return with a penny stock, sell quickly. Unfortunately, many traders get greedy, aiming for a 1,000% return. Considering that the penny stock you're in might be getting pumped up, take any profits and move on.
Are penny stocks hard to trade? ›Penny stocks can be difficult to sell
They're often hard to unload, due to all of the above and because the market for these securities is smaller. At the same time, they can be subject to wild and rapid price swings, which means the price could shift dramatically before you find a buyer.
Even if you don't trade penny stocks, knowing just how bad the returns are can teach you a little about the mechanisms (or lack thereof) behind stock returns on larger companies. Here's what they found: The median penny stock returns -37 percent per year. The average penny stock returns -27 percent per year.
How much do you need to make $100 a day trading? ›You're really probably going to need closer to 4,000 or $5,000 in order to make that $100 a day consistently. And ultimately it's going to be a couple of trades a week where you total $500 a week, so it's going to take a little bit more work. Want to learn more about trading?
How much can a beginner trader make? ›You can earn anything from Rs. 100 to Rs. 10,000 or even Rs 20,000 in a day with intraday trading. But this depends on your risk appetite.
Can you make millions on penny stocks? ›Can penny stocks make you rich? Although penny stocks have some great attributes, they are not right for everyone. These stocks truly can turn a small amount of capital into a huge sum of money pretty fast, but can just as quickly wipe that investment out.
Why do people not like penny stocks? ›Key Takeaways. Penny stocks are high-risk securities with small market capitalizations that trade for a low price outside major market exchanges. A lack of history and information, as well as low liquidity, make penny stocks riskier. Look out for scams involving penny stocks that want to separate you from your money.
Which penny stock will grow in future? ›- Vodafone Idea.
- Suzlon Energy.
- Alok Industries.
- Hemang Resources.
- Indian Overseas Bank.
- Avoid OTC/Pink Sheet-Listed Penny Stocks. ...
- Don't Fall for the Promotional Pumps! ...
- Only Trade Penny Stocks with Volume. ...
- The Hit and Run Approach. ...
- Making a Living 1 Trade at a Time.
Is penny stocks good for beginners? ›
Penny stocks have high volatility. This is a fact that concerns many investors. With such volatility, it is possible to lose all of the money that you have invested in penny stocks. The main reason behind this is that penny stocks whose share price is very minimal have experienced a major downfall.
What are the hottest penny stocks? ›- OPEN2.75-0.05% Opendoor Technologies Inc.
- NKLA2.780.05% Nikola Corporation.
- BBAI4.991.39% BigBear.ai Holdings, Inc.
- WISH0.78-0.00% ContextLogic Inc.
- FFIE1.060.06% Faraday Future Intelligent Electric Inc.
- BZFD2.160.07% BuzzFeed, Inc.
- EEENF0.010.00% 88 Energy Limited.
- MGTA0.810.25%
Penny stocks are among the market's most dangerous stocks, so you may pay a much greater price than you first expect, including potentially losing all of your investment. Here's what a penny stock is and why it's so risky to investors looking to grow their wealth.
Are penny stocks Too risky? ›You can get lucky in penny stocks, just as in lotteries. But if you play long enough, the “house odds” eventually triumph over any run of luck. In penny stocks or games of chance, the odds are against you. The longer or more often you play, the likelier you are to lose.
Was Apple ever a penny stock? ›Apple Inc.
Back in the early 2000s, AAPL traded for under 80 cents per share — a legit penny stock. As of this writing, AAPL shares trade for over $370. This stock returned over 46,750% — it's now one of the largest companies in the world.