Why investors pay attention to penny stocks?

Is it possible to find the best penny stocks currently and make money on them? What makes penny stocks attractive and at the same time risky?

 

In a general sense, they do not. Penny stocks are for "home run speculators". They are almost always thinly traded, so you can't get "any money" into them without becoming the market yourself. IOW... pennies are irrelevant for all but the smallest of small-time players.

 

Penny stocks are highly volatile, due to the extremely small market cap, it is easily to "manipulate" the price. Often you will get something called a pump and dump. Basically, some promoters out there will talk about how great the stock is and mail it out to a bunch of people. The people buying their store will buy the penny stock causing it to shoot up, while the person mailing out the info will sell it at a higher price. This happens a lot.

I don't know enough about penny stocks to really comment on how to make money in them. But I would imagine you have to do your homework.. Possibly ask one of the directors at the company to sit down and have a coffee with them, review their plans, financials, etc, and you might investing in a company that goes up 100 fold. You might also lose everything.

 

I didn't know! Do they really? ;-)

 

I used to play pennys, I was up briefly for over 1000%, then I got gambly, put it all on this 1 that was up huge and literally 12seconds already up 10%, the trading stops, errrm, delisted, lost the entire account but $70.

Next 3 trades ran that back to $1000 area, then next trade back to ZERO

So no, too risky, just don't bother!!

 

"Why investors pay attention to penny stocks?"

Generally investors don't look ever at a Penny Stock unless they know the CEO and have discussed the particulars about it. I own 5M shares of something at a price under a penny, it is the only Penny Stock I have owned in twenty years.

And no I won't discuss to anyone what it is. It is a total gamble and can become like wallpaper, but I have not done a real dumb thing in months...

 

There is a company about a mile from where I live. It went down into the penny stock area. I thought too bad, they are heading for bankruptcy. I should of bought some shares. It eventually recovered and went over $100 a share. Now I look at the building every time I leave my house. But I'm not into buying penny stocks. But I wish I had just this one time.

 

I think most investors don't; but some Traders do, and some focus on them exclusively (but I don't recommend that).

I think the primary reason some traders choose to trade them is because of their small float. This allows a few players, or a single large player, to have a big impact on the stock price, which results in higher percentage moves when the stock spikes (up or down). For the most part these stocks are good shorts after they've gone up on speculation or some pump-and-dump scheme.

What makes them risky is a lot of factors, some of them are:
- lower reporting requirements from the SEC, which means there's less public financial data available on the stock; and less media coverage
- they trade OTC and have low liquidity and wider spreads -- these combined w/small floats makes them easy to manipulate
- some of those companies are just a guy with an idea in a garage, and maybe a product prototype
- a lot of penny stocks are companies in bankruptcy
- lots of fraudsters/scammers in this area
- they often use paid stock promoters to pump the stock

I think some of the early research/clinical stage biotechs can have some potential as an investment, but you have to be very selective and make sure to research their management before investing, and be prepared to lose all your investment. Also, read this SEC page on first: https://www.sec.gov/investor/pubs/microcapstock.htm

 

I don't trade penny stocks (but I did dabble there a bit prior to the dot com bust).

As far as I can see, the only real edge in penny stocks is trend following on the down side. Go short when strong downward momentum has been established. This usually ends up being a one way street with low odds of recovery. Of course, the odd penny stock could see an upward spike which is why you'd want to spread your money across a basket of 20 or so shorts at any given time.