Why You Should Consider Trading Penny Stocks

The inherent nature of penny stocks makes them more likely to give you better returns than what you are likely to get from those priced significantly higher and traded on the stock exchange. 

Penny stocks are shares that trade under a dollar, and in some cases, below $5. In the US, these stocks are not traded on exchanges, but over the counter with the help of stockbrokers. And this is why they are also often referred to as over the counter (OTC) stocks.

Before looking at what makes penny stocks special, and in particular, where their potential to grow your worth comes from, let’s see how you can use the trends of the major stocks to decide which of the penny stocks to watch and trade. 

The industry influencers 

The primary idea of basing your decision to trade one stock on another comes from the fact that stocks usually form industry clusters. The clusters bring together companies that share the same clientele or are a clientele of one another. While individual stock might have unique price drivers such as company mission, vision, target clientele, and management, the forces affecting the industry they operate in are mostly the same and often more powerful.  

Also, within these industry clusters, there are particular companies whose actions affect the performance of others, especially penny stock companies. For example, renewable energy is an industry cluster, and Tesla, the electric car manufacturer, is one of its major influencers. 

In part, that is because there is almost a movement around the world, pushing for the adoption of electric cars to protect the environment from the destruction caused by the extraction and consumption of oil. The company has also won hearts through its innovation prowess. 

As a result, the price of Tesla’s stock has grown by close to 1000% this year alone. It is indeed one of the most well-performing companies this year.

This is an indicator that the companies within the same cluster, are most likely to have well-performing stocks. For example, take a look at these penny stocks of small companies building battery products and technologies that Tesla most likely will find useful for meeting the growing demand for electric cars. Most of them are not yet known in the mainstream. 

Why would you trade battery penny stocks and not Tesla?

When the price of Tesla stocks moves by $100 in a day, it attracts the attention of many. In fact, it is all over the news. Often that is about 20% to 30%. If you invested about $1000, it means you are likely to make about $300 on that day. That seems like a good deal.

What is not going to grab the attention of many, however, is when the price of a penny stock moves between $.35 and about $0.70 on the same day. It is still pennies, right. That is only a minuscule movement until you turn it into a percentage. Indeed, that movement converts to 100%.

That means if you bought $1000 worth of the penny stocks at the low price and sold at the high price, you are likely to make another $1000. It is important to point out such high percentage movements are so common in the penny stock market.  

This is exactly why penny stocks are attractive to those who know its secrets. 

It is not all roses though 

Of course, high returns almost always come with high risks. It is not any different with penny stocks. Just as the prices move in your favor, it can move the other way. And just as you can easily make $1000, you can lose the same amount.

To mitigate the risks, you must understand how the market works before putting your money in any penny stocks. In particular, you should learn how to predict price movements through sound technical and fundamental analysis.

And this is where understanding industry stock clusters becomes important. It allows you to create a promising watchlist. You can then proceed to understand the individual circumstances of the individual stop and make appropriate investment decisions.

Another risk you stand to face with penny stock is the pump and dump schemes. This is where some investors buy high amounts of the stocks and then run a campaign to create the impression that the company is about to do something significant such as make public a significant discovery. 

This drives the price up, and at some point, those behind the scheme sell their shares and make huge profits. It is either you recognize the scheme and keep away or play along and exit with those scheming.  

In a nutshell, you should put effort into learning from those who have become excellent at it.

Conclusion

Trading penny stocks offers immense opportunities, but only if you know how to exploit them. The way to get it right is to learn and also exploit the potential of major stocks and the industries in which they operate.