Home Finance Trading Penny Stocks for Beginners: What Drives Their Price Up and Down?

Trading Penny Stocks for Beginners: What Drives Their Price Up and Down?

Trading Penny Stocks for Beginners: What Drives Their Price Up and Down?
Image by makingmilly on Pixabay

Learning how to trade online is becoming a highly popular activity. But knowing where to start can be hard! 

The important thing is to do your research and understand the mechanics of the marketplace; once you understand how things work, it makes spotting profitable trades that much easier.

 To find out what drives the price of penny stocks up and down, as well as some top tips from the trade, just read on for more…

So, What Are Penny Stocks? 

Penny Stocks have different attributes depending upon the market, so we’ll take the SEC definition for the purposes of this article. 

To put things simply, Penny Stocks are trade stocks that are valued from between 1 Cent to $5. 

According to Forbes and the SEC, any stocks valued at over $5 shouldn’t be classed as Penny Stocks. 

But What Exactly Drives Their Price Up and Down? 

Image by Gerd Altmann from Pixabay

When you are thinking of trading penny stocks, it is important to realize that many factors will drive penny stocks and their prices up or down. 

A large proportion of new investors and traders might think it is because of a corporation’s earnings, their growth, or new acquisitions.  

It goes without saying that these aspects of trade/stock play a large part in penny stock prices, but that’s not just where it ends. 

There are truly so many influences, and these, unfortunately, get overlooked, even by some of the most advanced investors. Just take a look at our brief list below.

Some of the factors include:

  • Corporate Growth – just like a more expensive stock, signs of big contract wins or increased revenue drive prices up, and conversely, contract losses drive them down.
  • Sector/Industry Expansion – Where the sector that the company operates in is going through its own mini-boom, this can reflect on individual stock prices. Think about PPE or rechargeable battery companies over the last year.
  • Returns and Slowed Profits – Revenue isn’t everything, so if you have a company selling a ton of stuff but isn’t making any profit at all, this can badly damage the price. But remember that a change in management could make a big difference.
  • Volume of trades – amazingly, herd mentality can play a part. If traders see a lot of people vying to buy into a stock, then often they can buy in for the sake of it!
  • Social Media Hype / Media Boom – sentiment plays a bigger part in the price of a stock than many traders would care to admit. Good press can really boost the stock’s price without any underlying increase in the fundamental value of the business.

Okay, so being aware of these factors isn’t always going to set you up for a BIG win. 

However, they can be a great way to get you to your next ‘trading’ level.

By taking into account the factors mentioned above and more, you’ll notice better results – as it always pays off to do your homework. Analyzing your potential targets using a wide variety of attributes will give you more chance of success than using just one or two metrics.

Sadly, not all aspiring traders and investors do enough digging, and in light of the volatile nature of penny stocks – this can result in a loss of their investment. 

So given these factors, how can you use them practically when trading penny stocks? We’ve compiled a few of our top tips…on trading penny stocks. Just read on for more: 

3 Top Tips on… Trading Penny Stocks 

Top Tip 1: Volatility (The Good, The Bad, & The Ugly)

Penny stocks are volatile. Anyone in the industry knows that. This means that a penny stock that you choose to purchase could gain value really rapidly – but it could also lose it. 

This doesn’t mean that this is a bad thing for an active trader, but you need to make sure it works to your advantage.

Instead of this being a scary notion, it can be a real benefit. Learning how to trade penny stocks will teach you how to capitalize and make the most of volatility by surfing a wave of price increases and cashing out just before a fall.

Because penny stocks are set at a low price point, investors can buy or sell in large quantities within a shorter period of time, and the truth is that without volatility, day traders wouldn’t exist.

Tiny increases in value at the individual stock level result in huge increases at the portfolio level.

Learn how to play with volatility, and you’ll learn to love it too. 

Top Tip 2: Search Smart – (Dark Horse Penny Stocks)

Searching for a dark horse penny stock (i.e., a penny stock with an underlying value) can be incredibly difficult. 

You can use various tools to make this method easier, and it makes sense to utilize the power of technology to give you an advantage.

As mentioned above, doing your homework is key. Any profitable trader or investor has done their research before purchasing/selling. 

In addition to this, several different types of software can help you to ‘trade smart.’ 

Think about using stock screeners and scanners to find likely targets, and make sure that you use demo and dummy accounts to test your trading strategies.

Image by Csaba Nagy from Pixabay

Top Tip 3: it’s not just about knowing when to get in 

Learning how to trade penny stocks AND make a profit isn’t the easiest skill to learn, and one of the areas that cause the most issues is knowing when to get out.

Timing is key when it comes to trading. It always has been and always will be. 

Before purchasing penny stocks (thoroughly researched ones), you should set yourself some price targets.

I.e., What kind of profit are you hoping for? How long will you keep a penny stock? How much would you be willing to lose if it came to it? 

These are all the types of questions you should be asking yourself. Set realistic targets, and they will be easier to achieve, rather than far-fetched unlikely goals.

Emotionally it is difficult to cash out when you have a stock that is on a roll, but it is important to make sure you stick to your trading strategy and take profits when they reach your goal.

Hanging on to a stock for too long is one of the cardinal sins of a penny stock trader.

Setting a percentage increase as your goal and then selling when it reaches the right level means that you lock in profit. Nobody is saying that you can’t buy in again later if your analysis suggests it is right, but you’ll often find that bigs wins are followed by big falls that could wipe out any profit you have made.

This way, you can ensure that no matter what happens to your penny stock, with almost every trade you make, you’ll have the potential for a reasonable ROI (return on investment). 

While these are just a few examples, there are plenty of ways to capitalize from Trading Penny Stocks.

Good luck with your trading journey

Featured Image by makingmilly on Pixabay