Buying Penny Stocks; Is It Worth It? What to Know About Investing in Stocks Under $5
Penny Stocks Are More Popular Than Ever, But Are They Worth It?
The post Buying Penny Stocks; Is It Worth It? What to Know About Investing in Stocks Under…
Investing in penny stocks has become one of the most popular choices for retail and institutional traders in the past few years. All over the internet, we see ads touting the next best cheap stocks or the potential of triple-digit percentage gains. And while this seems too good to be true, that’s because it is; for the most part. Every trader will tell you that there are no secrets that Wall Street has access to that you don’t.
With the right tools and information, everyone can be just as informed as the most educated investors are. It’s also worth noting that small and medium-sized gains can quickly add up. Over the past few weeks, companies like Canopy Growth (NASDAQ: CGC) and BRF SA. (NYSE: BRFS) have made big gains. This has helped to increase the popularity of investing in penny stocks by quite a lot.
And while some investors benefit greatly from investing in penny stocks, others swear off of them because of the large losses that they may have accrued. With every story about a large winner, there are likely to be hundreds of stories of even larger losses. Now, I’m not saying that penny stocks aren’t worth it by any means. Rather, investors simply need to find all of the information that they can before sending in a buy order.
What Are Penny Stocks?
Before we go any further, let’s discuss a brief overview of what penny stocks are. The term penny stock means any stock that is trading under $5. This opens up the possibility to thousands of different companies. And while some are well under $1, the range of under $5 companies is not centered around any one price point. Penny stocks can be bought on the NYSE, NASDAQ, and OTC.
While the exchange is not always the most important part, it is something to consider for liquidity’s sake. Because penny stocks have gained a less than stellar reputation over the past decade, many investors avoid them. However, the chance of profitability can be much greater than with blue-chip stocks. For example, it’s more likely to see a $0.05 stock jump to $0.10 than it is to see a $100 stock jump to $200. Considering this, let’s take a deeper dive into the pros and cons of investing in penny stocks.
Buying Penny Stocks: The Ins and Outs of Utilizing Cheap Stocks to Make a Profit
How to Buy Penny Stocks
Avoiding Illegitimate Penny Stocks
How Much Money do You Need to Make Profits With Penny Stocks?
1. How to Buy Penny Stocks
Buying penny stocks can be as simple as buying any security. But, it’s important to note that there are certain restrictions for trading penny stocks such as those listed on OTC markets. This depends greatly on what trading platform you use. For example, Robinhood will allow investors to purchase almost any stock listed on the NYSE or NASDAQ. However, it does not allow access to the OTC market.
A large portion of penny stocks are traded via Pink Sheets or OTC markets. This is due to the stringent requirement and expensive cost of listing on a large U.S. exchange that can not always be met by smaller companies. Because of this, they may choose to list on the OTC or over-the-counter exchange.
Also, many penny stocks do not meet the minimum bid price of $1 that large exchanges such as the NYSE and NASDAQ can require. So if you want to buy penny stocks, your best bet is to go through a broker such as E-Trade, TD Ameritrade, or Fidelity. One thing to keep in mind is that often, penny stocks can have low volume. This can lead to issues when trying to buy or sell. This is simply something that investors need to look out for. All in all, buying penny stocks can be easy with the right brokerages and tools at hand.
2. How to Avoid Illegitimate Penny Stocks
While many penny stocks are legitimate, there is always the potential to find less legitimate ones. This can be the case with blue chips as well, but it is more often seen with those listed under $5. The best way to avoid this is through research. As any investor will tell you, research will always be your best friend. But, what exactly are you looking for?
Well, one of the best resources out there is the OTC website (otcmarkets.com). This site will tell you point-blank if a company should be avoided or not. Additionally, most if not all information about a publicly listed company is available online.
This information will tell you what the company is doing, what its financial situation is, what its plans are for the future, and so on. While penny stocks on the OTC market are not always required to post information in the same way that big-name exchanges require, they will often disseminate information for the benefit of investors.
Another aspect to consider and one that was mentioned above is liquidity. Because there are thousands of penny stocks both popular and not as popular, volume can sometimes be extremely low. This means that prices will change in a matter of seconds as orders are filled, with large gaps between pricing.
The Securities and Exchange Commission or SEC states that “Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price.” Taking all of this into consideration, it is easier than imagined to avoid scams when looking for penny stocks to watch.
3. How Much Money Do You Need to Make Profits With Penny Stocks?
The short answer to this is that it all depends on what you have available. To simplify this, let’s talk about one example. If you invest $1,000 into a stock and make a 20% profit on a single trade, you will walk away with $200. If you invested $100,000 into that same stock, you’d walk away with $20,000.
As you see, it is all about scale. Now there are very few people who have the free income to put $20,000 into a single trade. But, if you can make consistent gains with the money you have to invest, those numbers can add up very quickly.
With penny stocks, there are two strategies. On one hand, investors can bet on the long-term future of a company. If you pick right, it could pay off substantially as prices go up in the coming months or years. On the other hand, traders can educate themselves on how to identify patterns in intraday movements. This is referred to as swing trading. While it’s easy to lose money when first starting; if you are committed to learning, there is a lot of value to be had down the line.
Are Penny Stocks Worth It?
Yes and no. For some investors, day trading or picking a long-term winner might not be the most viable strategy. If you’re not committed to learning and spending time going through charts/data, this may not be for you.
However, if you are, penny stocks can pay off in either the short or long term. Yes, penny stocks are right for some investors, but they’re not right for everyone. It’s important to distinguish what type of trader you are, to help define realistic goals for your portfolio. So after reading all of this, are penny stocks worth it or not? The choice is yours.
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution…
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution of the market into a “casino” following the pandemic, where retail traders have increased their speculative appetites.
“Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the “fear of missing out.” The chart below shows the “dumb money index” versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the “smart money.””
“The difference between “smart” and “dumb money” investors shows that, more often than not, the “dumb money” invests near market tops and sells near market bottoms.”
That enthusiasm has increased sharply since last November as stocks surged in hopes that the Federal Reserve would cut interest rates. As noted by Sentiment Trader:
“Over the past 18 weeks, the straight-up rally has moved us to an interesting juncture in the Sentiment Cycle. For the past few weeks, the S&P 500 has demonstrated a high positive correlation to the ‘Enthusiasm’ part of the cycle and a highly negative correlation to the ‘Panic’ phase.”
That frenzy to chase the markets, driven by the psychological bias of the “fear of missing out,” has permeated the entirety of the market. As noted in “This Is Nuts:”
“Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.”
Of course, it is not just a speculative frenzy in the markets for stocks, specifically anything related to “artificial intelligence,” but that exuberance has spilled over into gold and cryptocurrencies.
Birds Of A Feather
There are a couple of ways to measure exuberance in the assets. While sentiment measures examine the broad market, technical indicators can reflect exuberance on individual asset levels. However, before we get to our charts, we need a brief explanation of statistics, specifically, standard deviation.
“Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices that are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average.”
The idea of “stretching the rubber band” can be measured in several ways, but I will limit our discussion this week to Standard Deviation and measuring deviation with “Bollinger Bands.”
“Standard Deviation” is defined as:
“A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of the variance.”
In plain English,this meansthat the further away from the average that an event occurs, the more unlikely it becomes. As shown below, out of 1000 occurrences, only three will fall outside the area of 3 standard deviations. 95.4% of the time, events will occur within two standard deviations.
A second measure of “exuberance” is “relative strength.”
“In technical analysis, the relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can read from 0 to 100.
Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.” – Investopedia
With those two measures, let’s look at Nvidia (NVDA), the poster child of speculative momentum trading in the markets. Nvidia trades more than 3 standard deviations above its moving average, and its RSI is 81. The last time this occurred was in July of 2023 when Nvidia consolidated and corrected prices through November.
Interestingly, gold also trades well into 3 standard deviation territory with an RSI reading of 75. Given that gold is supposed to be a “safe haven” or “risk off” asset, it is instead getting swept up in the current market exuberance.
The same is seen with digital currencies. Given the recent approval of spot, Bitcoin exchange-traded funds (ETFs), the panic bid to buy Bitcoin has pushed the price well into 3 standard deviation territory with an RSI of 73.
In other words, the stock market frenzy to “buy anything that is going up” has spread from just a handful of stocks related to artificial intelligence to gold and digital currencies.
It’s All Relative
We can see the correlation between stock market exuberance and gold and digital currency, which has risen since 2015 but accelerated following the post-pandemic, stimulus-fueled market frenzy. Since the market, gold and cryptocurrencies, or Bitcoin for our purposes, have disparate prices, we have rebased the performance to 100 in 2015.
Gold was supposed to be an inflation hedge. Yet, in 2022, gold prices fell as the market declined and inflation surged to 9%. However, as inflation has fallen and the stock market surged, so has gold. Notably, since 2015, gold and the market have moved in a more correlated pattern, which has reduced the hedging effect of gold in portfolios. In other words, during the subsequent market decline, gold will likely track stocks lower, failing to provide its “wealth preservation” status for investors.
The same goes for cryptocurrencies. Bitcoin is substantially more volatile than gold and tends to ebb and flow with the overall market. As sentiment surges in the S&P 500, Bitcoin and other cryptocurrencies follow suit as speculative appetites increase. Unfortunately, for individuals once again piling into Bitcoin to chase rising prices, if, or when, the market corrects, the decline in cryptocurrencies will likely substantially outpace the decline in market-based equities. This is particularly the case as Wall Street can now short the spot-Bitcoin ETFs, creating additional selling pressure on Bitcoin.
Just for added measure, here is Bitcoin versus gold.
Not A Recommendation
There are many narratives surrounding the markets, digital currency, and gold. However, in today’s market, more than in previous years, all assets are getting swept up into the investor-feeding frenzy.
Sure, this time could be different. I am only making an observation and not an investment recommendation.
However, from a portfolio management perspective, it will likely pay to remain attentive to the correlated risk between asset classes. If some event causes a reversal in bullish exuberance, cash and bonds may be the only place to hide.
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Credit: Impact Journals
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Impact Journals will be participating as an exhibitor at the American Association for Cancer Research (AACR) Annual Meeting 2024 from April 5-10 at the San Diego Convention Center in San Diego, California. This year, the AACR meeting theme is “Inspiring Science • Fueling Progress • Revolutionizing Care.”
Visit booth #4159 at the AACR Annual Meeting 2024 to connect with members of the Agingteam.
About Aging-US:
Agingpublishes research papers in all fields of aging research including but not limited, aging from yeast to mammals, cellular senescence, age-related diseases such as cancer and Alzheimer’s diseases and their prevention and treatment, anti-aging strategies and drug development and especially the role of signal transduction pathways such as mTOR in aging and potential approaches to modulate these signaling pathways to extend lifespan. The journal aims to promote treatment of age-related diseases by slowing down aging, validation of anti-aging drugs by treating age-related diseases, prevention of cancer by inhibiting aging. Cancer and COVID-19 are age-related diseases.
Agingis indexed and archived byPubMed/Medline (abbreviated as “Aging (Albany NY)”), PubMed Central, Web of Science: Science Citation Index Expanded (abbreviated as “Aging‐US” and listed in the Cell Biology and Geriatrics & Gerontology categories), Scopus (abbreviated as “Aging” and listed in the Cell Biology and Aging categories), Biological Abstracts, BIOSIS Previews, EMBASE, META (Chan Zuckerberg Initiative) (2018-2022), and Dimensions (Digital Science).
Please visit our website at www.Aging-US.com and connect with us:
NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism
One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%.
The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.
Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.
We find the rent expectations surprising because it is happening just asking rents are rising across the country.
At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.
Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."
Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.
Turning to household finance, we find the following:
The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."
Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months
Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.
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