Trading penny stocks is risky and highly speculative. However, day traders and investors in the stock market like trading them because of their volatility. In trading, volatility can be your best friend or your worst enemy – More of that later.
Penny stocks are described as stocks that trade under $5.00. You can find penny stocks in different sectors of the market. It is not uncommon to find penny stocks with market caps of over $1B in the U.S stock market: Because of the basic definition of penny stocks, These stocks inadvertently fall into that category.
These stocks are typically very volatile mainly because of their shares structure as it pertains to the hype around them. The hype is typically not limited to news, perception of the stock being in a hot sector/ the next big thing, investor interest, e.t.c. For example a biotech penny stock- Dendreon in 2007 that ran up over 5000% based on their revolutionary drug that underwent successful phase 3 trials thus putting the company in a position to get acquired by a bigger pharmaceutical company. Another good example is Human Genome: This company pretty much has the same story as Dendreon as they too had a signifant move ahead of their phase 3 clinical trials. Investors were convinced that Human Genome would be bought out by a bigger pharmaceutical company as their revolutionary drug was gaining a lot of attention. These are just two out of over a thousand stories that traders and investors have taken advantage of and ultimately benefitted from as a result.
Remember: Trading stocks is extremely risky, however, if you are a fan of fast returns and volatility, then you ought to consider investing/trading these instruments. penny stocks are usually atop most stock boards, and are usually in play per news releases. These securities are typically featured on websites like Briefing.com and street insider. Another reason why a stock may become popular and for lack of words “in play” is because of the share structure and perhaps their short interest. You can get a better perspective on hot penny stocks and how to trade them.
Before starting to invest or trade stocks, you need to decide if they are right for you. This decision is based on your own assessment of your risk profile.
If you feel you have the capacity to be able to deal with great risk and in fact you thrive in this sort of environment then trading and investing is for you.
However if you have little spare money and are in a difficult financial position then you are probably better off investing your money in more established stocks.
Again on the other hand if you have plenty of money but you don’t like taking great risks then it is also best to avoid penny stocks.