Penny stocks are among the riskiest investments available in the equity market. These stocks typically have a good reason for their low price, which is less than $5 per share. For instance, a penny stock may be associated with a previously successful business that is currently facing bankruptcy or that was forced to delist from the major exchanges and is now transacting over-the-counter (OTC). It might be a new business, in which case it doesn’t yet meet the requirements to be listed on a major exchange and has a limited history in the market.
By their very nature, penny stocks are dangerous and volatile, and they’re particularly vulnerable to price manipulation. But occasionally, a penny stock will significantly benefit the risk-taking investor. If you had purchased Monster Beverage Corporation (MNST) stock in 1996 at a price of At $4 per share, you would be a successful investor right now: in 2020, Monster traded above $66. .
If the prospect of achieving such exponential gains excites you, it might be worthwhile to explore the murky world of penny stocks.
Penny stocks, with their low prices and potential for explosive growth, can be a tempting investment opportunity. However, they also come with significant risks, and knowing how long to hold them is crucial for maximizing your returns and minimizing losses.
This guide will delve into the world of penny stocks, exploring the factors that influence holding periods and providing strategies for making informed decisions. We’ll also examine the potential rewards and risks associated with holding penny stocks for different durations.
Understanding Penny Stocks and Their Volatility
Penny stocks are shares of small companies that trade for less than $5 per share. They are typically traded over-the-counter (OTC) rather than on major exchanges, making them less regulated and more susceptible to manipulation.
Due to their low prices and limited liquidity, penny stocks are highly volatile. Their prices can fluctuate dramatically, often based on speculation and hype rather than fundamental factors. This volatility makes it challenging to predict how long a penny stock will remain at a low value or when it might experience a surge.
Factors Influencing Holding Periods for Penny Stocks
Several factors can influence how long you should hold a penny stock:
- Company Fundamentals: Analyzing the company’s financial health, growth potential, and management team can provide insights into its long-term prospects. A company with strong fundamentals and a clear growth trajectory may be worth holding for a longer period.
- Market Conditions: The overall market sentiment and sector performance can impact penny stock prices. During bull markets or when specific sectors are hot, penny stocks may experience significant gains. However, during bear markets or sector downturns, they may decline sharply.
- Trading Strategy: Your investment goals and risk tolerance will determine your trading strategy. If you are a short-term trader seeking quick profits, you may hold penny stocks for a few days or weeks. If you are a long-term investor, you may hold them for months or even years.
- Technical Analysis: Studying charts and technical indicators can help identify potential entry and exit points for penny stocks. Technical analysis can provide insights into price trends, support and resistance levels, and momentum indicators.
- News and Events: Company-specific news, industry developments, and regulatory changes can significantly impact penny stock prices. Staying informed about these factors can help you make informed decisions about holding periods.
Strategies for Determining Holding Periods
There is no one-size-fits-all answer to how long you should hold penny stocks. However, several strategies can help you make informed decisions:
- Set Clear Goals and Timeframes: Define your investment goals and establish a timeframe for achieving them. This will help you determine how long you are willing to hold a penny stock before taking profits or cutting losses.
- Use Stop-Loss Orders: Implement stop-loss orders to automatically sell your penny stocks if their prices fall below a certain level. This can help mitigate losses and protect your capital.
- Monitor News and Events: Stay informed about company-specific news, industry developments, and regulatory changes that could impact your penny stock holdings.
- Reassess Regularly: Regularly review your penny stock investments and reassess your holding periods based on market conditions, company performance, and your investment goals.
Potential Rewards and Risks of Holding Penny Stocks for Different Durations
Short-Term Holding (Days or Weeks):
- Potential Rewards: High potential for quick profits if the stock price surges due to speculation or positive news.
- Potential Risks: High risk of losses due to volatility and potential manipulation.
Medium-Term Holding (Months):
- Potential Rewards: Moderate potential for gains if the company experiences positive developments or the market sentiment improves.
- Potential Risks: Moderate risk of losses due to volatility and potential for the stock price to stagnate.
Long-Term Holding (Years):
- Potential Rewards: Potential for significant gains if the company experiences sustained growth and its stock price appreciates over time.
- Potential Risks: High risk of losses if the company fails to meet expectations or the market sentiment turns negative.
Holding penny stocks requires careful consideration of various factors, including company fundamentals, market conditions, trading strategy, technical analysis, and news and events. By understanding these factors and implementing appropriate strategies, you can make informed decisions about how long to hold penny stocks and maximize your chances of success.
Remember, penny stocks are high-risk investments, and there is no guarantee of success. Always conduct thorough research, manage your risk carefully, and be prepared for potential losses.
Penny Stock Industries
Naturally, there will be a profusion of penny stocks in industries where the majority of the companies offer binary outcomes. Speculative plays that have binary outcomes, or “make or break,” are primarily found in the resource or biotech industries.
Several penny stocks with resource-based values that surged in popularity during the 2000s commodity boom originated on the Canadian TSX Venture Exchange. When the celebration came to an end, the majority of the stocks fell to zero, much like many technology stocks did during the 2000 crash.
Traders can still profit from binary-type businesses, though, in advantageous circumstances, such as a boom in commodities. However, investors in these sectors also need to be aware that stock prices can drop as quickly as they can rise.
Check the Fundamentals
It is advisable for investors to perform extensive research before investing in penny stocks. For example, investing in the struggling Walter Energy Co. might have seemed like a smart move. After all, Walter Energy had traded as high as $143. 76 a share in 2011. However, those who invested in Walter Energy when it was worthless 16 would still have burned because the business quickly went bankrupt. On the other hand, an investment in Inovio Inc. (INO), which was trading for less than $1 in 2008, provided investors with several chances to sell above $10 between 2009 and 2013 and 2020. .
Company fundamentals are where these two stocks diverge most. Walter was a well-known business in the aging industry of metallurgical coal, which was vulnerable to political and cyclical demand. Global leaders’ pledges to reduce greenhouse gas emissions put further downward pressure on Walter Energy, which was already suffering from a glut of coal supply globally and a slowdown in Chinese demand. In the end, Walter sold its assets to two businesses in 2016. .
Inovio, on the other hand, is a speculative biotechnology play with solid partnerships in its portfolio of cancer vaccines and strong buyout potential. As of 2020, there hasn’t been a takeover, but the stock keeps declining and then experiences sharp gains that soon fade.
Therefore, when investigating penny stocks, you should carefully consider any potential gains in comparison to the fundamentals of the business, which include Porter’s Five Forces of Competition, the company’s debt, cash flow, and buyout potential. Before you even consider purchasing an equity, you should understand the whole story behind why the stock is trading at its current price.
Like with any stock purchase, fundamental research and careful consideration of the management caliber of the company can help identify winners and weed out losers when considering purchasing penny stocks.
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FAQ
Should I stay away from penny stocks?
Is investing $1 in stocks worth it?
Do penny stocks ever go big?
Can a penny stock recover?
How long should you hold penny stocks?
Unlike most blue-chip stocks, penny stocks generally don’t follow cyclical trends. So it may be more difficult to know how long you should hold penny stocks. But don’t be disheartened by this. Sectors, however, will go through cycles and as the saying goes, “a rising tide can lift all ships.”
Should you buy a penny stock under $5 per share?
These stocks, which trade under $5 per share, are usually priced that low for a good reason. For example, a penny stock could belong to a once-thriving company that is now on the brink of bankruptcy or has had to de-list from the larger exchanges and is now trading over-the-counter (OTC).
How much money can a penny stock make?
Shares of penny stocks are investments in companies that usually trade for less than $5 per share. Say you purchase 10,000 shares of a stock at 30 cents per share and the price then goes up to $1 per share. If you sell at this time, you’ll make $7,000, more than doubling your money. Sound too good to be true?
What is a penny stock?
The Securities and Exchange Commission (SEC) defines a “penny stock” as a security issued by a small-cap or micro-cap company that has a market capitalization of less than $250 million. Others define penny stocks as those that trade at less than $5 per share (though some experts choose to adopt a lower cut-off value of $1 per share).