If you invested $10,000 in Netflix stock on January 31st, 2007, when the DVD rental business was trading at $3.26, and held it till now, that investment today would be worth nearly $1,000,000…
…the exact figure is actually $978,306 as of Friday’s close. Nonetheless, this buy-and-hold penny stock trading strategy has yielded a whopping 9,683% returns!
Or how about this one:
Imagine throwing down $10K on a little known energy company by the name of Monster, in the summer of 2001, when it’s trading near $0.08 per share…
Do you have any idea what that investment would be worth today?
Well, before I tell you the number, let me first say this, Monster Energy (MNST) has lived up to its name; the company has a market cap north of $34 billion and is a member of the S&P 500.
Oh and that investment, if you just happened to have held this whole time, it would be worth a jaw-dropping $7,702,469 today…
That’s a total return of 76,924.69%
Now, despite how sexy these returns may be… there is one thing I don’t do with penny stocks… and that’s invest in them.
Well, if you’re looking for investments, I’ll tell you one thing: penny stocks aren’t meant to be invested in.
There are three problems with investing in penny stocks.
1) Lack of Professional Research
Penny stocks (those trading under $5 with market caps of less than $2B) generally aren’t covered by Wall Street firms.
In other words, they don’t provide research, analysis, price targets, etc. That means it’s really the wild wild west.
You see, these investment banking firms don’t research penny stocks because there is no value offered to them… and it’s often hard to value penny stocks because to the untrained eye… it seems like they just move up and down for no rhyme or reason.
Basically, Wall Street firms provide research and place buy ratings in an attempt to get future business from companies. These firms will place ratings on companies in an attempt to receive future business from publicly-traded companies…
… but with penny stocks, it’s unlikely that they will seek services from investment banking firms… so that’s why you don’t see many analyst ratings.
For example, when you look at Apple Inc. (AAPL), there is a lot of coverage.
You’ll notice there are some of the largest banks covering AAPL, like JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America.
However, when you look at the Finviz page for a stock like Riot Blockchain (RIOT), which is trading around $2.50 and up over 10%, you’ll notice that there is no analyst coverage.
That goes to show you that these firms don’t see any value from these companies… and they don’t want their clients invested in penny stocks because they move based on other indicators not known to them.
2) It can be hard to value penny stocks
Penny stocks are often valued based on potential and not actual financials… and they sometimes lack transparency.
For example, it’s easy for traders to value large-cap stocks.
Well, they face stringent financial reporting requirements… and have well-established businesses.
For example, when you look at a stock like AAPL or Microsoft (MSFT)… you can figure out what their core businesses are… and analyze earnings announcements to see where the company thinks future revenues and earnings will be.
On the other hand, penny stocks don’t have well-established businesses and the way to value these companies is based on potential growth. Generally, these companies are in the early stages and are going through cash in order to expand operations.
On paper, these stocks look terrible as investments.
Would you invest in a company that’s burning through cash?
Not only that, some penny stocks don’t have to report their financials either. These penny stocks are listed on the OTC Markets, and they don’t face as stringent reporting requirements as those listed on Nasdaq or NYSE.
For example, here’s a snippet of the income statement for BTCS Inc. (BTCS), which is listed on OTCQB.
It’s pretty hard to value a stock like this right?
This stock has no revenues… and is just burning through its cash… so it’s hard to consider an investment in it.
3) Pump and Dump Schemes
When people hear the term “penny stocks”, they often associate it with pump and dump schemes.
The way pump and dumps work is there is a group of traders, or the company itself, that announces a press release. Typically, it’s positive news and attracts buyers, which sends the stock soaring.
However, with pump and dump schemes… the stock pulls back really fast.
Well, traders use that as a profit-taking opportunity, so they end up selling their shares… flooding the market with supply and pushing the stock back down.
We see it all the time…
… and if you’re invested in these stocks… you can go from being euphoric thinking you’re up a ton of money… to panicking as the stock dumps… causing you to sell your shares for a loss.
You might be thinking, Jeff does that mean I shouldn’t even consider buying penny stocks at all?
What I’m proving here is that penny stocks are bad investments. However, that doesn’t mean we can’t make money off trading penny stocks.
You see, my specialty lies in trading penny stocks… and they actually could be a lucrative part of your trading strategy.
— RagingBull (@RagingBull) August 4, 2019
You see, there are actually 3 reasons to trade penny stocks.
Trading Penny Stocks Could Be Lucrative
1) Profit Potential
When you look at the top gainer on any given day… it’s typically a penny stock.
For example, on Friday, IPIC – a stock trading under $2 – was up over 40% and one of the top gainers.
It’s not uncommon to see these stocks up that much in any given day.
The reason: penny stocks are volatility.
As investments, volatility is no fun. However, as traders, we want a lot of movement in stocks… and penny stocks are among some of the most volatile stocks out there.
What that means is you can buy a penny stock one day… and wake up the next day taking profits off the table for 10 – 20%… and this happens all the time.
However, with large-caps, you don’t really see them up 10 – 20%, unless there is really positive news, like earnings – which only happens four times a year. With penny stocks, if you can spot the buying opportunity… you can be taking 10% – 20% fast… almost every day.
2) Penny stocks provide you with leverage
Another reason I trade penny stocks is the leverage they offer.
What that means is you don’t need a whole lot of capital to get started trading penny stocks.
For example, let’s say you have a $5,000 account.
If you tried to buy 100 shares of… you would need to use all of your capital to buy a measly 37 shares. Think if Microsoft (MSFT) moves 5% in a day… you would only make around $246 bucks.
While that may be a win… you actually miss out on opportunities.
Well, if you put all your capital into one stock… and you see another trade opportunity… you can’t buy more shares.
On the other hand, since penny stocks are cheap (under $5)… you could actually buy a lot of shares… and if the stock moves higher, well… that means more money in your pockets.
For example, let’s say you see a penny stock with a bullish setup and it’s trading at 75 cents. Well, you can buy 2,000 shares… and that would only cost you $1,500. That means if you see other opportunities, you still have room to work with.
While you need a large account to trade large-cap stocks the right way… you can get started with trading penny stocks with as little as $3,000.
How do I know you can get started with as little as $3,000?
Well, I’m actually taking on the Small Account Challenge – looking to turn $3,000 into $100,000 by trading penny stocks.
Heck, six weeks into the challenge I was up a whopping $10,924.31… or ~365% in real-money returns.
How was I able to achieve these results in such a short period?
Well, I focused on my chart patterns.
3) My Chart Patterns Work With Penny Stocks
Penny stocks might be hard to value… but I’ve found a new simple way to find money-making opportunities in penny stocks… and that’s by looking at the charts.
For example, one of the patterns I use is called Staircase to Profits.
Basically, I look for this specific pattern…
… and I find a price level that sets me up for success.
Typically, what happens when I take a trade based on this pattern… I wake up the next day and take profits.
Just because penny stocks make bad investments… that doesn’t mean you shouldn’t trade them.
Penny stocks provide you with leverage… and you don’t need a lot of capital to get started trading them. The beauty about trading penny stocks is that you can make money in them… fast… using my simple system – The Profit Prism.
If you want to learn more about my trading system and how it helped me lock in ~365% in just 6 weeks (I was up 299% just 4 weeks!) all from trading penny stocks… Click here to get started.