Penny stocks have a well-deserved reputation for being of low quality, posing a significant risk, and experiencing extreme volatility. However, with proper study, investors can unearth hidden gems—cheap securities with excellent fundamentals and growth prospects—in the most unexpected areas.
To make an informed investment decision, prospective penny stock investors must first comprehend the ins and outs of this stock market segment. How are penny stocks defined? How do investors acquire penny stocks? Which of the following are the finest penny stocks to invest in? Moreover, what considerations should we make before investing in penny stocks?
We have included updates on previously covered penny stocks below and a few new intriguing and affordable trading ideas that are still flying under the radar of the majority of investors.
In the traditional sense, a penny stock is a share in a firm that is worth less than a cent in the United Kingdom. Nowadays, such equities are scarce and must be purchased outside the protection of the major stock markets.
The current definition of a penny stock is a share in a firm priced less than $5 — or is classified as a small-cap company on the NASDAQ Capital Markets tier.
Can We Make Money on Penny Stocks?
Making money with penny stocks is doable, and however, it is technically feasible to profit from any stock. Successful investors typically focus on the long-term potential for their stock picks to increase in value, regardless of their current price.
There are several reasons to invest in small businesses. Investors who invest in fast-growing companies while still tiny benefit far more from share price appreciation than those who wait until the company becomes giant.
On the other hand, penny stocks are nearly never the bargains they appear to be, and their stock is inexpensive for a reason. Firstly, penny stock companies are unproven and undersized, with questionable long-term viability; at worst, penny stocks are used by con artists to defraud naïve investors.
Penny stock investors frequently believe, incorrectly, that a low share price implies a company with better growth potential than those with a higher share price. In actuality, a company's valuation – often called market capitalization – is determined by two factors:
This second aspect is critical since the corporation has complete discretion over the number of shares to issue. One million shares outstanding at $100 apiece is equivalent to 100 million shares outstanding at $1 apiece. Additionally, a company with a $100 share price certainly has significantly greater growth potential than one with a $1 share price.
Because regulatory authorities are aware that penny stocks are highly alluring to many investors, they are pretty open in stating their risks. As the Securities and Exchange Commission of the United Warns states, "investors in penny stocks should be prepared to lose their whole investment." (Italics added in the original.) While this is technically conceivable with any stock investment, it is more likely with penny stocks.
How Do Penny Stocks Work?
Penny stocks operate similarly to other types of stocks, and each penny stock is equivalent to one share of a corporation. Investors can purchase penny stocks and sell them at a profit if the stock price increases; however, determining when to sell small stocks is tricky.
The Risks Involved in Trading Penny Stocks
Penny stocks carry significant risks in comparison to common stocks. Among the dangers are the following:
1. Penny stock companies are tiny.
The majority of publicly listed corporations are significant businesses with a clear demonstration of their worth, typically varying from hundreds of millions to a trillion dollars or more. Companies that issue penny stocks are often relatively small, with even the most extensive penny stock company typically valued at far under $100 million.
2. Penny stock companies are unproven.
It is uncommon for companies you are already familiar with to be included in the ranks of penny stocks. Rather than that, penny stocks are typically those of smaller, less established businesses that have yet to demonstrate their ability to endure and prosper.
3. Penny stocks do not trade on major stock exchanges.
The New York Stock Exchange (NYSE) and the Nasdaq Stock Market (NASDAQ INDEX: IXIC) do not list penny stocks. Rather than that, penny stocks are frequently traded over the counter or OTC, and companies trading on the OTC market are subject to less stringent reporting requirements than those listed on the NYSE or Nasdaq. Buying and selling penny stocks efficiently can also be challenging. Equities that are less often traded are more illiquid, implying that big spreads between bid and ask prices are prevalent.
4. Pump-and-dump scams occasionally target penny stocks.
Con artists frequently target penny stock investors by portraying a penny stock firm as the next big investment thing. Creating a buzz around a penny stock can artificially inflate its share price, and the price increase can be claimed as evidence of the company's success. After the stock price increases, the scammers often sell (dump) their shares and cease advertising the stock. Typically, the share price then collapses precipitously, resulting in substantial losses for late-arriving investors who bought the hype.
Things to Consider Before Investing in Penny Stocks
Check for Quality
In general, penny stock companies have a small market capitalization. That is to say; they are diminutive. Consider the following reasons for each company:
On the plus side, does the company have a low valuation due to its infancy? Is it possible that it has revenues coming in the next few years that have not yet reached the balance sheet? Has it been embroiled in a huge issue that has impacted its share price but is presenting viable solutions to reclaim a thriving business?
Or, on the other hand, is the company's valuation low due to a flawed business plan, poor management, or an outmoded product or service range?
Low Liquidity
One of the main advantages of trading penny stocks through a regulated broker is that you escape the issue of limited liquidity. Low liquidity indicates that a small number of shares in a specific company are traded, which means that you may become unable to sell shares. A broker such as eToro offers only securities listed on major exchanges, where liquidity is typically (but not always) an issue.
High Volatility
In comparison to large-cap stocks such as Amazon, General Motors, and Apple, Penny stocks are high-risk investments. Because of their small dimension, it only takes a very limited amount of trade to impact the price of penny stocks significantly. On the other hand, this volatility can work in the investor's favor, but it has the potential to eradicate them.
Consider Fractional Share Alternatives
Nowadays, fractional shares are available. Previously, this was not feasible. Penny stocks were popular because they could be purchased for a tiny amount of money, whereas the price of one share in a well-established, large-cap firm with less risk was prohibitively high.
1. Camber Energy Inc. (NYSE: CEI)
This is one of the most prominent penny stocks that investors have monitored over the last several months. CEI is also a popular meme stock and short squeeze stock for investors who have invested for at least a year. While shares are down almost 13% year to date, we have seen some optimistic activity since March.
This is primarily due to the increase in demand for oil and gas as a result of the Ukraine situation. On the other hand, Camber Energy is an intriguing penny stock on its own. The company's most recent announcement came on April 4th, when it announced communication from the New York Stock Exchange. It added that it got correspondence from the NYSE on its request for an extension of the deadline for filing its overdue financial reports.
Camber Energy is an energy firm focused on expansion. Camber is able to deliver customized energy and power solutions to a diverse variety of industrial and commercial clients throughout the United States through its subsidiary, Viking Energy. As previously noted, the situation in Ukraine has placed a premium on both energy penny stocks and the energy business in general. Camber is well-positioned for future expansion as a result of its recent acquisition of carbon-capture technology.
2. DiDi Global Inc. (NYSE: DIDI)
DIDI stock is another popular penny stock that investors are interested in. While shares have lost almost 65% of their value over the last six months, we have seen some positive progress in recent weeks. Now, one of the primary reasons investors are paying attention to DIDI stock at the moment is its volatility. Moreover, in the last couple of weeks, there has been a flurry of DIDI stock announcements and subsequent swings.
The company has recently experienced increased volume as a result of reducing delisting fears. Additionally, Beijing has claimed that it is 'preparing to provide full access to auditing reports' for a number of the major Chinese companies listed on the New York stock markets.
Before proceeding further, it is necessary to recognize that the DIDI stock is highly volatile. And given its significant losses over the last six months, this is quite obvious. However, DIDI's huge volume makes it an ideal option for intraday volatility for trading reasons.
3. Uranium Energy Corp. (NYSE: UEC)
Uranium Energy Corp. is another prominent penny stock in the energy sector that investors have been following. UEC stock has increased by nearly 54% in the last six months, which is no small feat. Uranium Energy made headlines on April 5th when it announced the release of a technical report summary for its Wyoming hub and spoke network. This was and continues to be significant news for the corporation, establishing it as a prominent player in Wyoming's uranium industry.
Historically, we have considered uranium a significant source of renewable energy; but the stigma has prevented it from realizing its full potential. Even though nuclear energy is a very environmentally friendly energy source, investors have only recently begun to invest in it. While UEC is a very volatile stock, it is apparent that many people are interested in it.
4. Inpixon (INPX)
Inpixon provides location-based services and big data analytics to a global client base from its headquarters in Palo Alto. It offers a range of sensor solutions that enable clients to optimize indoor areas through the use of Wi-Fi and Bluetooth. The company has a market value of about $37 million and 220 workers led by CEO Nadir Ali.
INPX is a stock that has had a challenging year. The price has dropped over 80% within a year, from over $1.20 to its current figure of $.024. Therefore, why invest? To be sure, many dismiss Inpixion as a dud investment. However, the price has fallen a lot, and Inpixon may be worth a small investment as part of a balanced portfolio. It will not take much of a price movement to reap the investor's significant proportionate gains.
5. Nano Dimension Ltd (NNDM)
Nano Dimensions, based in Israel, is a 3D printing provider that supplies software and technology to accelerate electronics manufacturing. The startup uses Deep Learning AI to target the prototyping phase of typical production timeframes.
A single Nano Dimension share is trading at $3.27 at the time of writing. Since its stratospheric ascent to $15.54 early last year, the share price has plummeted significantly to its current level. This is a frequent occurrence when high-tech enterprises enter the market. What has not helped the pricing is the recent purchases of Global Inkjet Systems and Essemtec?
The stock price that has bounced twice this year is excellent from a technical charting perspective, and this indicates that it has 'double-bottomed' at a $3 resistance level. The price dropped to a little under $3 on January 24th and March 14th before rocketing higher to reach $3.90.
As a result, this is unquestionably a volatile stock. If it creates a channel between $3 and $4, it (around $3.27) would be an excellent moment to buy for a short-term hold and sell at $4.
6. Sunworks Inc. (SUNW)
Sunworks is a solar energy company based in Roseville, California. The company distributes photovoltaic systems to local industrial and agricultural businesses.
Sunworks employs over 500 people and has a market capitalization of $66.5 million; this is a high staff-to-market capitalization ratio, implying that reorganization may be one of several options for increasing firm profitability.
Between 2020 and 2021, total Sunworks revenues climbed by more than 150 percent, from $37.9 million to $101 million. However, this did not affect the stock price, which steadily declined since reaching a high of almost $25 in January 2021. Since the third week of February 2022, the price has been above the $2 barrier, rebounding dramatically from a low of $1.72 on March 24th. For the time of writing, one Sunworks share is trading at $2.24.
The excellent news for Sunworks is that a potentially fatal California Public Utilities Commission (CPUC) order known as NEM 3.0 has been suspended indefinitely. The NEM would have imposed new taxes on solar users and cut rebates for surplus solar generation.
Finally, investing in Sunwork is a gamble on a small solar energy firm with questionable management and financial performance. However, this is a volatile stock with excellent short-term potential; on March 8th, the stock price jumped past $5 during market hours before falling to $3.76. Purchase now at $2.24 for a short-term bet on potential positive news in the solar energy sector.
7. Globalstar (GSAT)
Globalstar, founded in 2003 and headquartered in Covington, Louisiana, is a satellite communications firm established in the United States. The company operates a satellite and ground station network that serves around 775,000 subscribers in various industries, including energy, forestry, and public safety.
Unusually for a penny company, Globalstar has a market value of $2.5 billion, and its price/earnings ratio is a fair 11.5. Quarterly revenues climbed by about 6% to $34.48 million in Q4 2021, while net income increased by 22%. As a result, we may classify this penny stock as an established business experiencing difficulty rather than a startup with an unclear future.
Globalstar is in jeopardy since it projects net income shortfalls of over $100 million in 2020 and 2021. On February 24th, the GSAT price reached a 2022 low of $0.92. Since then, the share price has skyrocketed to $1.52 on March 29th, and it has reverted to its previous level of $1.33.
What is promising from a technical charting perspective is that the price appears to have double-bottomed this year; on January 24th and February 24th, the price bounced after hitting a level of $0.92. After a gradual fall throughout Q3 and Q4 2021, the price has stabilized and begun to rise.
8. Zynerba Pharmaceuticals Inc. (ZYNE)
Zynerba is a cannabis-related specialty company headquartered in Pennsylvania, United States of America. The firm focuses entirely on the healthcare sector in the United States. Zynerba combats rare diseases by producing formulations that are applied to patients' skin to relieve discomfort. For instance, Zynerba has produced an experimental medication called Zygel, a patent-protected gel containing marijuana that relieves pain.
Despite the markets' initial enthusiasm for cannabis equities, the ongoing issue for all cannabis-related businesses in the United States is that cannabis remains illegal on a federal level. This may (or may not) change as a result of this year's Senate judgments.
Zynerba has been in the research and development phase since 2018. As a result, it generated no revenue and had huge net income deficits from 2018 to 2021. This is typical for a corporation developing products in a new field.
Zynerba's stock is now trading at $1.84. Investors who purchased during the second quarter of 2019 (when the price soared to $15.50 on July 8th, 2019) will be disappointed. However, what about the rest of us? Is there a possibility of an upswing?
Whatever the company's issues, the truth remains that if its products succeed in gaining traction and US governmental pressure on the cannabis business eases, the only time to capitalize on these events is now.
9. Lloyds Banking Group PLC (LYG)
Being one of the top four UK banks, Lloyds is a member of the UK FTSE 100, with a share price of £44.66 ($58.40). However, it is also listed on the NASDAQ, currently trading at $2.28.
Generally, penny stocks represent small-cap firms. However, not this one. Lloyds Banking Group is a behemoth with a 325-year history and a statutory profit after tax of £5.9 billion ($7.8 billion) in 2021. Lloyds owns a number of well-known businesses in the United Kingdom, including Halifax Bank, Bank of Scotland, Scottish Widows, and several insurance companies. In comparison to many penny stocks, there is little danger of Lloyds going bankrupt.
Lloyds, on the other hand, has encountered difficulties. The terrible effect of the pandemic on the share price can be seen in Q1 2020. The price dropped from slightly more than $3.25 in January 2020 to $1.16 in late September. Since then, the price has steadily rebounded until 2021, when it nudges the $3 threshold. Prices began to decrease in 2022, owing partly to the Ukraine conflict.
10. Eros STX (NYSE: ESGC)
Eros STX is organized around two primary business units. The Eros segment creates entertainment material and maintains an Indian-specific streaming service. The STX division produces films and television programs primarily for Western markets, but this content is also valuable to Eros because it may be offered on its streaming platform. The subscription video market in India and other Southeast Asian countries has enormous development potential, making Eros STX stock an attractive option for risk-tolerant investors. As of early 2022, the stock is trading at less than $1 per share. And bear in mind that it may be trading at a discount for the cause.
Final Thoughts
Where can we get penny stocks? We wholeheartedly endorse Top1 Markets as the best broker for penny stocks. Compared to other online trading platforms, Top1 Markets has a nice, straightforward feel to it and prides itself on assisting newcomers to the stock market through its Social Trading program.
It is not for everyone to trade penny stocks, and it necessitates a certain level of risk tolerance and the capacity to react rapidly in uncertain situations.
However, suppose you believe you possess the skills necessary to day trade penny stocks. In that case, you must develop how to trade them and money management practices to prevent losing all of your hard-earned capital.
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