A penny stock is usually defined as a security issued by a small company that trades at less than $5 per share. These are stocks that are usually quoted over the counter, such as on an over-the-counter bulletin board or pink list.
The legal definition of low-priced stocks is more specific. Penny stock refers to any non-National Market System (NMS) stock that is registered for trading on a national stock exchange and has an offer price of at least $4 per share.Other requirements must be met to obtain inventory Not regarded as penny stocksFor example, shareholders’ equity must be at least 5 million U.S. dollars, the company must have at least 750,000 U.S. dollars in net income, its market value must exceed 50 million U.S. dollars in at least one year, and so on.
The U.S. Securities and Exchange Commission (SEC) requires brokers to provide you with a statement before you make your first transaction warning you of the risks involved in low-priced stocks.
Penny stocks are highly speculative. The odds of losing your entire investment in a penny stock are far greater than hitting a home run and making huge profits. Despite this, millions of people still trade low-priced stocks every day. Here are 10 types of penny stock investors, whether they are long, short, or both.
1. Experienced penny stock traders
Many people who thrive in the avid trading world achieve this goal by opening up a niche market in a particular industry or asset. Penny stocks are one such niche market, even though the number of traders who trade these stocks is only a small fraction of those who trade mature securities and blue chip stocks. Experienced penny stock traders are not deterred by the industry’s limited liquidity, wide bid-ask spreads, and frequent market pricing manipulation. For these players, even in a turbulent market like low-priced stocks, there is nothing to surprise them. They can be day traders or swing traders, and they will hold both long and short positions.
2. Corporate Insiders
When company insiders (such as senior management) buy company stock, they are usually seen as confident in the company’s prospects. Conversely, when these insiders sell stocks, it usually indicates that the company is deteriorating and its stock price may collapse. However, this rule of thumb does not entirely apply to low-priced stocks, because internal activities usually move in one direction: the volume of sales usually dwarfs the buying rate (partly because the company may be about to go bankrupt). These insiders often help plan the manipulation of the low-price stock market, allowing traders to artificially increase the trading volume of a particular stock or group of stocks through actions such as “surge and sell-off” plans.
3. Hedge funds
Although many financial institutions are prohibited from trading low-priced stocks, loosely regulated hedge funds have no such restrictions. In other words, most hedge funds do not trade penny stocks long: they prefer to short penny stocks, which seem to have peaked after being heavily promoted. Penny stocks, although they do often trade at a price of a few cents, short selling is still very dangerous due to the risk of short squeezing. Therefore, although the risk-reward return of shorting a penny stock is too skewed (that is, if the short-selling strategy is effective, it provides a limited return, if it is invalid, it provides unlimited risk), it is not worthwhile for ordinary investors, but This strategy may attract deep-pocket hedge funds.
4. Short sellers
Savvy traders know that short selling penny stocks is more important than buying and holding them. However, unlike hedge funds, these traders may lack the funds needed to withstand the occasional short squeeze. Therefore, they must rely on the network and use their experience and market intelligence to determine suitable short targets, whose share will drop sharply from current levels. These short-sellers are unlikely to “buck the trend” and sell short stocks that have risen due to a large number of promotions. Conversely, once stocks start to fall, they may increase their short positions, hoping to accelerate their demise.
5. Corresponding Author
Some investment correspondence authors will produce enthusiastic reports about certain low-priced stocks. For this, the promoters reward them with cash and a large chunk of related stocks. Although their stock payments may be escrowed for a certain number of weeks or months to prevent immediate dumping by the newsletter author, they may “work hard” once the lock-up period expires.
6. Investor Relations Company
Investor relations companies usually provide services to low-priced companies, such as arranging meetings between management and investors and analysts, customizing company presentations, and disseminating press releases. In return, they are usually compensated in cash and company stock. Unsurprisingly, these companies are likely to be sellers of low-priced stocks rather than buyers.
7. Market Maker
Market makers are broker-dealers who facilitate the trading of specific securities by displaying the buying and selling quotations of a large number of stocks. Market makers trying to provide liquidity in the low-priced stock market will naturally become an important contributor to trading volume. After receiving a buy order from a trader, the market maker can sell the stock in its inventory, or buy the stock from the market, and then sell it to investors. Conversely, for a sell order, the market maker can absorb the stock into its inventory or dump it into the market immediately.
Speculation is the lifeblood of the penny stock market. However, before any major sell-off begins, large purchases must be made to drive up the price of penny stocks. Most of the purchases come from long-term speculators who are proficient in the game and have profited from successful penny stock trading in the past. These players continue to speculate, hoping to repeat their earlier successes, but there is usually a limitation: Those who have suffered huge losses may stop trading low-priced stocks after a long time.
9. Ordinary investors
Even experienced “traditional” investors occasionally succumb to the temptation to quickly profit from the so-called popular tip of penny stocks. It may be a friend or acquaintance who claims to be closely related to the promoter of the penny stock, or the investor may be persuaded by a skilled newsletter author who carefully designed a reliable investment perspective. These investors may get involved in the low-priced stock market once or twice, but once they suffer some losses, they may call it a day and insist on trading what they know best: blue chip stocks and high-end securities.
10. Inexperienced and careless investors
Then there are some novice investors who believe they can get rich through low-priced stocks. They are fascinated by the idea of buying 10,000 10-cent stocks for just $1,000. Once the price of this 10-cent stock reaches 15 cents, their return on investment will reach 50%. However, the harsh reality is that such pricing changes are not common. Even if it does happen, wide bid-ask spreads and limited trading liquidity often prevent investors from selling quickly to close positions and lock in profits.
Many people trade penny stocks every day, but remember that the number of penny stock sellers dwarfs the number of buyers, and only experienced people can survive long-term in the industry. If you really succumb to the temptation to try your luck in low-priced stocks, you should treat your investment as a very short-term transaction rather than any form of long-term strategy.