Volume and Liquidity
Penny stocks can will often gain or decrease in value with even the slightest provocation. This can happen with no news or even a limited trading history in the stock. Even if you see a penny stock up 200% in a day, it does not mean that it’s a hot penny stock.
Lets say that there is an investor who loves gold penny stocks. He loves the gold market and thinks that a gold company is a good place to park his assets rather than buying the hard commodity. He wants the most bang for his buck, so rather than invest his $10,000 in Newmont Mining (NEM) he looks for a cheap penny stock.
The uneducated investor puts in a market order for said penny stock. The penny stock he chose was extremely illiquid and hasn’t traded a share in weeks. This could result in a 100% leap in the price of the stock because of the buying pressure. Now the market cap on this stock just doubled on a $10,000 investment. The market cap is now twice that of what it was 30 seconds before the trade. Is this justified?? No. This could be a false catalyst to peak the interest of an uneducated investor who is using a stock screener that alerts them to increases in price on penny stocks. This stock will eventually drift back down as there is no more buying in the stock.
A major part of the process while investing in a penny stock is to understand what driving factors are taken into consideration in the price of penny stock shares. If a penny stock jumps high on very little volume, chances are something like I just mentioned happened.
This is why you must put together a list of penny stocks and take your time to do research on each individual company.
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