It’s all fun and games until your account is blown out.
Regarding investment vehicles, they have to rank among the worst.
Don’t get me wrong… I’ve made several million dollars throughout my career from penny stocks.
But there are some things you just have to know before trading them.
Mess this up, and you’re likely to suffer some devasting losses.
Here are three warning signs you must know before trading penny stocks.
Table of Contents
#1 The Majority of Penny Stocks Are Garbage.
If you invested $1,000 in Amazon’s IPO, it would be worth $1.5 million today.
That’s the allure of penny stocks.
Imagine buying one stock and being set up for the rest of your life.
If it sounds too good to be true…then it probably is.
The majority of penny stocks are just crappy companies.
They will pay promoters to bring awareness to their stock.
If the stock pumps and trades higher, they will use the opportunity to sell stock and raise capital.
And they’ll do anything within their power to make this happen. They’ll try to pump via social media and various email campaigns, issue press releases, and pay chat rooms to get their name out there.
It can be a dirty game…what can I say.
That’s why I always tell my students to expect the absolute worst from these companies.
#2 Fundamentals Rarely Matter
Most of the penny stock companies trading are unprofitable. They have almost no fundamentals whatsoever.
In addition, there aren’t Wall Streets analysts that research these types of companies.
Not only that, but they are often moving based on fear and greed.
That’s why you shouldn’t really bother looking into the company’s financials. Instead, focus on the sector the stock is in, and if that’s a hot theme in the current market.
Pay attention to the press releases and identify if similar press releases are moving stocks positively.
#3 Buyer Beware
For the most part, holding onto penny stocks for more than a few hours can be risky.
You never know when the company will raise capital and dilute shareholders.
Usually, a stock will tank after it raises capital.
In addition, the stock could be halted by the regulators if something suspicious is going on.
Why I Love Penny Stocks
I know I spent a good portion of this blog post bashing penny stocks.
But that’s what they are…crappy stocks.
However, it’s important to note that it doesn’t deter me from trading them.
I love the fact that no analysts are researching these stocks.
Because I would rather trade against unsophisticated investors.
And let me tell you something, most people who trade penny stocks aren’t world-class traders.
If there’s money on the line, would you rather compete with superior or inferior competition?
I don’t know about you…but I would rather trade against amateurs.
And since fundamentals rarely play a role…I find it easier to take advantage of other traders’ emotions.
For example, some of my current favorite strategies, like the panic dip buy, aim to take advantage of FOMO, fear, and greed.
There’s nothing glamorous about penny stocks.
But from my experience, they offer some of the best opportunities for traders to profit.
I’ve discovered that human emotions don’t change much over time….
And that the patterns and opportunities in penny stocks can be predictable.
Moreover, I would focus on penny stocks if I was starting with a small account.
It’s what I did when I just had five figures to my name…and what I’m doing now with millions in the bank.
If you’d like to learn more about my penny stock trading framework and I’ve helped dozens of my students on their millionaire journey, then CHECK THIS VIDEO OUT.