June 18, 2021, 6:16 p.m. EDT

What Are Penny Stocks And Should You Invest in Them?

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

Jun 18, 2021 (Penny Stocks via COMTEX) -- Investing in Penny Stocks in Summer 2021

Penny stocks are some of the hottest commodities of the year. With massive rises in value in only a short time frame and low prices, penny stocks remain popular among all types of investors. While these stocks have gotten a bad rap over the past few years, there is no reason to be scared of penny stocks.

Let's start by identifying what they are. Penny stocks are any stocks trading under $5 . These could be NASDAQ, NYSE, and most likely OTC listed stocks. One thing to keep note of is liquidity. If the volume is lower than a few hundred thousand, it may be difficult to buy or sell shares when the time comes.

[Read More] Hot Penny Stocks to Buy Right Now? 7 For Your Watchlist

However, this should not be too much of a worry if a stock is listed on a large exchange, as this mostly pertains to OTC listed penny stocks. The next thing to consider is speculation and what speculative factors are impacting a penny stock. This could be company-specific, industry-specific, or even global economic trends. These tend to have a large role in how penny stocks trade and why prices move. The last aspect for investors to note is current market conditions.

Right now we have an influx of retail traders. This has appeared in stocks such as GameStop Corp. ( NYSE: GME ), BlackBerry Ltd, ( NYSE: BB ), AMC Entertainment Holdings Inc. ( NYSE: AMC ), and Sundial Growers ( NASDAQ: SNDL ), among others. Because there is so much movement in the market right now, paying attention to everything can be the difference between profits and losses. Considering this, let's take a look at what penny stocks are and whether investing in them is right for you.

Ins and Outs of Investing in Penny Stocks in 2021

  1. What are Penny Stocks?

  2. Are Penny Stocks Worth it?

  3. Investing in Penny Stocks in Summer 2021

As stated earlier, the definition of penny stocks is any security trading under $5 per share. This leaves the options open to hundreds if we consider only the NASDAQ and NYSE, and thousands if we bring in the OTC exchange. While there are plenty of penny stocks to watch on the NASDAQ and NYSE, most people associate penny stocks with the OTC exchange.

OTC or over-the-counter is a place where companies can go public without the need for a major IPO and the stringent listing requirements of a large U.S. exchange. This is the main reason that there are so many penny stocks listed on the OTC. As mentioned previously, one of the important things to consider with penny stocks is liquidity. Liquidity is basically how easy it is to buy or sell a stock, and it directly ties into volume. Volume is the amount of shares trading hands over a given trading day.

So, for example, a blue cap stock could trade upwards of a few million shares on a great day. Whereas, an OTC stock could trade a few hundred thousand to the hundreds of millions. If a stock is trending heavily, it can trade millions of shares, indicating high ease of buying and selling.

However, if a stock is trading under a few hundred thousand or even in the tens of thousands, buying and selling it can be extremely difficult. This should not serve to scare you out of buying penny stocks , but rather inform you as to what to look for. So, while penny stocks have gotten a bad name in the past few decades, the reality is that any stocks under $5 are penny stocks.

This is a tough question to answer because every investor is different. But, let's define the two main types of investors. On one hand, we have short-term investors or swing traders. These are the most common traders you'll see buying and selling penny stocks. This strategy can be good if you are interested in high volatility stocks, and plan to buy or sell in short periods. However, if you're more interested in holding, let's talk about long-term investing. This is the type of trading that involves careful research into each and every company.

Once this research is done, these investors will buy a chunk of shares and hope for the best in the long term. This can also be a great strategy with penny stocks as we often see these securities traverse the $5 threshold. Both of these types of investors can make money with penny stocks, but the company one plans to invest in should align with their strategy. Many investors will look for penny stocks that are popular on social media. This is a decent way to make a watchlist, but it should only be one component of your overall strategy.

[Read More] These Penny Stocks Are Up Big Today, Worth It or Not?

For example, take a look at Orphazyme ADR ( NASDAQ: ORPH ). After shooting up by almost 300% in a single day last week, shares have since declined by almost 65%. If you were swing trading ORPH stock, you may have made money. However, if you planned to hold it for the long term, you likely would have done the opposite.

1 2
This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.