Are Penny Stocks Risky?

By Timothy Sykes
Last updated on February 24, 2021
are penny stocks risky

People love to ask me: “Are penny stocks risky?”

First, don’t make ignorant assumptions. There’s ZERO hope of becoming a smart trader if you can’t think for yourself.

When it comes to the markets, most people just rely on what major news outlets tell them. Instead of thinking for themselves, here’s what they do:

  • Tie up their entire accounts by buying expensive shares of mega-cap stocks.
  • Buy tons of shares of the hottest new IPOs they see on the news.
  • Avoid penny stocks like the plague because they’ve been told they’re “too risky.”

So how do these strategies work out? Let’s go through them one by one.

Big Companies, Small Returns

Plenty of people believe that stocks like Google, Facebook, or Amazon are “safer” trades than penny stocks. It IS true that they’re less volatile.

But are they a better buy? That depends on your goals.

If you already have a big account and plenty of time to let your account grow, then sure. Buy up on the biggies.

But you should know: these stocks are super slow movers. For example, in the past 100 days…

  • Facebook has gone from $166 to $188
  • Google has gone from about $1,040 to about $1,300
  • Amazon has gone from $1,740 to about $1,775

Yes, there’s some growth there. BUT…

… that’s over three months…

… and…

What if you’re trading with a small account? Can you really afford enough shares to take advantage of that growth?

If you don’t want to want to wait years and years to grow your account, this is NOT the direction to go.

Volatility leads to greater risk. But it also means that your returns could be much greater — and much faster.

Why settle for good enough?

That’s why I love penny stocks.

But it’s also exactly why you have to invest in your education. You have to build a solid knowledge base and trading plans before you get into the game.

The Problem With Hot IPOs

Here’s what the majority of people think when they hear about a hot IPO:

Wow, this new company is going public! OMG, I saw this brand on Instagram! I’ve gotta buy!

Yeah, a brand-new stock can seem SO sexy. You could get in — on the ground floor. It sounds so amazing…

Plenty of idiot buyers rush in and load up on shares of the hottest IPO. But they don’t understand something very important…

History often repeats itself. And if these people bothered to do any research at all, they’d see that recent ‘hot’ IPOs burned buyers.

Here’s what happened if you bought these hot IPOs on day one…

  • If you bought shares of Slack (WORK), you’re now down 50%.
  • If you bought shares of Peloton (PTON), you’re now down 30%.
  • If you bought Revolve Clothing (RVLV), you saw a spike at first … but now you’re down 20%–30%..
  • If you bought Uber (UBER) from May to July, your spend was in the $30s and $40s … and now the stock is in the $20s.

Congratulations, morons!

If you bought shares on day one, don’t hold your breath waiting for a return on your investment. It could take years — if it ever happens at all. IPOs are becoming more and more like pump and dumps. Don’t be a sucker.

Why I Love Penny Stocks

OK, Tim, I get it … large-cap companies won’t grow my account fast, and IPOs are mostly hype. But aren’t penny stocks super risky?

There’s a reason penny stocks are the ugly duckling of stocks. They’re volatile. Most of these companies will fail.

But you know what? It doesn’t matter that most of these companies will fail. Why? You can still take profits along the way.

Just think about some recent plays…

DCGD was one of the best plays in the past few months. In a very short period of time, it went from a quarter of a penny (not even a penny!) to $2 per share. It doesn’t even matter that it’s probably a shell company.

If you bought and sold when it got to a penny, you made four times your money.

If it went to a dollar, you made 400 times your investment.

… and once it got to $2, you made 800 times your money in just a few weeks.

Yep: this stock eventually crashed. But that doesn’t matter! It doesn’t matter where the stock ends up. It’s about recognizing and taking advantage of the pattern while it’s in play. I don’t give a crap what the stock does now.

Runners like this can also lead to sympathy plays…

  • CLSI was a sympathy play to DCGD. It went from a third of a penny up to 11 cents…
  • COWPP is another related sympathy play. It went from a penny to about 50 cents…

Yes, there’s risk with that volatility. But there’s so much potential to gain, too. You’ll never see these kinds of gains in such short time periods with large-cap stocks.

It IS possible to profit with this style of trading. I’ve been doing it for 20+ years, and I document every single trade. See for yourself.

Preparation Is Key

So … are penny stocks risky? The entire market is full of risk. Trading is risky. Period. I say it all the time. The question is how can you get in on penny stock action but learn to manage your risk?

That’s simple: education.

Simple, but not easy. Getting up to speed with how penny stocks work requires a ton of hard work, studying, and practice.

Over time, you’ll see that the same patterns can repeat over and over … Honestly, most of my winning trades are the result of three key patterns.

But it’s not just about memorizing these patterns, because they’ll always be slightly different. It’s about understanding them so you can adapt as needed. It’s about being PREPARED so that the next time a pattern comes around, you’re ready.

Some of my students, like @AdamYaretz, see it…

Are you ready to see it?

I created my Trading Challenge so that I can help new traders begin to gain this kind of understanding of the market.

My goal isn’t to make them parrots who can recite different stock terms and patterns. It’s to help them understand how and why the market moves. I want to help my students grow into self-sufficient traders so that they can make their own educated decisions.

Ready to speed up your learning curve? Consider joining my Challenge.

Are Penny Stocks Risky?

Yeah, penny stocks can be risky. But you can help mitigate that risk by working on your education. You can research and make thorough trading plans. You can then stick to those trading plans. And ALWAYS cut losses quickly.

The big question is … what do you want to achieve as a trader?

If you ignore penny stocks, you’re ignoring a type of investing that could help you grow a small account. Show me a big company that can do that!

As for me? I love penny stocks. I will always focus on these big percent gainers. And take profits along the way.

Recent Tweets, Comments, and Trades from Students

Here’s what my students have to say about it:

Student Tweets and Profit.ly Mentions

@michael258637 sees the benefits of pennystocking:

Profit.ly user Tommy_D is learning from my lessons and making smart decisions with penny stocks: Buy the dips, sell the rips. I promise to sell into strength, but also will cut losses quickly if the trade goes against me.

@eric79513771 is committed to learning and getting inspired by the success of my six-figure profit student Dom:

@yojennsemite is seeing green by pursuing penny stocks:

@alexkelso is seeing steady returns by making SMART penny stock trades:

[Please note these results are not typical. These traders have exceptional knowledge and skills that they’ve developed with time and dedication. Most traders lose money. Trading is risky. Do your due diligence and never risk more than you can afford.]

What do you think: Are penny stocks risky? Leave a comment and tell me what you think!

Share