Low-priced stocks This is where many new traders start their careers. Attractive day traders with significant financial gains and low entry costs.
The story of stocks rising more than 5,000% in a short period of time has increased their appeal, and advances in trading technology have made entering the market easier than ever.
But what are they and Can you get rich from low-priced stocks?
What are penny stocks?
According to the US Securities and Exchange Commission, penny stock refers to any stock that trades at or below US$5 per share. These stocks are usually traded on the less regulated over-the-counter (OTC) or “pink sheet” markets, but are also traded on listed exchanges such as the New York Stock Exchange and Nasdaq.
Low-priced stocks are usually issued by small companies with lower market capitalization.
In most cases, these companies are usually located in industries that some market participants believe have strong growth potential, such as precious metal mining, medical hemp, fuel cell development, and biotechnology.
Why low-priced stocks are considered a way to get rich
Penny stocks are seen as a way to get rich because they tend to have high percentage returns. You can’t deny that the mathematics of owning these stocks is psychologically attractive, especially for inexperienced traders.
For example, suppose you have 1,000 USD.
If you decide to use all $1,000 to buy a stock. You are weighing two different options-you can buy 10 shares at a price of $100 per share, or you can buy 1,000 low-priced shares at a price of $1 per share.
If you buy 10 shares of stock priced at $100 and the price per share soars by $1, you will only get a profit of $10.
If you choose low-priced stocks and the price jumps to $1 per share, your investment will double.
This kind of thinking is deceptively attractive and may destroy other logical and sane people.
You look at the $100 stock and imagine that your penny stock is there. If so, your 1,000 shares are worth $100,000.
This simple example quickly revealed the attractiveness of low-priced stocks.
The risk of trading low-priced stocks
Although penny stocks offer trading opportunities, day traders must realize that achieving their ambitious goals requires more effort and may take longer than initially anticipated.
In addition, penny stocks are considered to be more risky than large stocks because of their lower level of supervision and sharp price volatility.
By buying penny stocks, you can own more stocks than ordinary stocks. In addition, low-priced stocks can quickly double, double, or gain more value because of their low prices.
However, these stocks may also suffer huge losses in a short period of time.
Penny stock example
Although companies with $100 stocks are unlikely to be eliminated anytime soon, companies with $1 stocks certainly can. If the larger stock drops by $1, it will only cost you $10 and keep holding it, hoping that it will rise again over time.
If the penny stock you bought falls by 1 dollar, it will be completely wiped out and you will lose all 1,000 dollars.
Compared with stocks traded on formal exchanges, penny stocks have less regulatory oversight, and their low prices mean that small price fluctuations can quickly accumulate into huge percentage fluctuations.
In addition, trading in penny stocks is very rare (poor liquidity). This means very few stocks (Low float) Compared with the stocks of large companies, there are transactions/transactions every day. This concept is called liquidity.
Most professional traders with large accounts are also prohibited from trading these stocks because they are highly speculative.
In addition, low-priced stocks are usually “Pump and dump“Plans and scammers. Some scammers sell stocks just to offload the stocks to the lightly traded market, making a profit in the process, but causing other traders to suffer losses.
Penny stocks are extremely risky, and this is an important thing that traders should keep in mind every day.
This is not to say that these stocks can never be traded wisely, but that caution needs to be exercised when trading low-priced stocks.
Can low-priced stocks make you rich?
Although penny stocks have some good attributes, they are not for everyone. These stocks can indeed turn a small amount of capital into a huge amount of money fairly quickly, but they can also wipe out this investment very quickly.
It seems attractive that you can buy a company’s stock at a very low price, if one day it soars to the same price as Amazon, you will become very rich.
However, you need to remember that the cheap price mainly means that the company has a high risk, and it is very likely that it will not be profitable or exist within a few years.
In short, these stocks are cheap for a reason.
Set realistic expectations
Do you have realistic expectations when trading low-priced stocks, or are you pursuing unrealistic profit targets?
As a day trader, your job is not to establish a lasting relationship with these stocks; it is to trade them by setting realistic expectations for profit. Remember, same-day trading involves buying and selling stocks or financial securities within the same day.
In other words, you will close all positions at the end of the day.
Therefore, it is important to set realistic expectations and choose the right penny stock. There are several factors that affect your choice of low-priced stocks, among which the notable ones are quarterly earnings reports, media announcements, press releases, FDA approvals, etc.
The key to remember about penny stock trading is to choose the right stock and have realistic expectations.
Utilizing fundamental and technical analysis tools, using stock scanners, and scanning press releases for valuable news can also help.
In addition, pay attention to important patterns, including: double bottom pattern, Fibonacci retracement, flat top breakout, bull flag breakout, golden cross pattern and flag chart pattern.
You can check our Technical Analysis Guide.
Compared with the stocks of popular companies such as Apple, low-priced stocks seem to be very cheap (Nasdaq: Apple) Or Tesla (Nasdaq: TSLA), but usually they are much more expensive, even though their price tags are cheaper.
They are one of the most volatile stocks in the market, so you may pay a price much higher than originally expected, including the possibility of losing all your funds.
Therefore, before trading these stocks, make informed trades and read as much as possible.
The most important thing is that you must set realistic expectations for potential trading returns and keep in mind that every unit of profit is accompanied by a unit of risk.