Should You Invest In Penny Stocks?

I’m sure you’ve heard the term “Penny Stocks” before, but the question is, should you be trading penny stocks?

In this article, I’ll show you the pros and cons of trading penny stocks. This way, you can decide whether penny stock trading is for you, whether you can make money with penny stocks, and also, is it worth your time?

So let’s get started.

The Pros Of Trading Penny Stocks

Now, it’s very easy to find the pros of trading penny stocks because there are a lot of ‘Penny Stock Gurus’ constantly shining a spotlight on the few benefits they have.

1. You Can Start With As little as $1,000

One of the things that make penny stocks so popular is the fact is that you can start with very little capital. I would say at a minimum you could start with as little as $1,000.

Penny stocks by default are stocks that are worth less than $1. So most penny stocks are trading between $0.10 and $1.

So $1,000 would buy you 1,000 shares of stock, or if it is trading at $0.10 it is buying you 10,000 shares!

That’s quite a lot, right?

So $1,000 would buy you 1,000 shares of stock, or if it is trading at $0.10 it is buying you 10,000 shares!

That’s quite a lot, right?

2. “Penny stocks can only go up”

Another pro is where they say, “It can only go up.”

And why is this? Well, think about it. If you can buy a penny stock for $0.10 or $0.20, what can happen?

I mean, it could possibly go to zero, but as you can see, the risk is limited because you’re buying this stock very cheap.

And this is where many people who promote penny stock trading say, “Well, you know what? It’s a good thing because, with so little room to the downside, it should only go up!”

I mean, it could possibly go to zero, but as you can see, the risk is limited because you’re buying this stock very cheap.

And this is where many people who promote penny stock trading say, “Well, you know what? It’s a good thing because, with so little room to the downside, it should only go up!”

3. “You can easily make 100x your investment”

Now, also talking about it can only go up, you can “easily”, based on what they say, make 100 times your investment.

Because think about it, if you’re buying it for $0.10 and it goes to $10 this would be 100 times your capital.

So if you start with $1,000 and you really catch one of the penny stocks that move from $0.10 to $10, you could make $100,000 out of $1,000.

I mean, this is what many people who promote penny stocks are leading you to believe. And it is true, right? If you catch one of these.

So that’s the other thing.

4. Small moves lead to big gains

Just in general, small moves in the penny stocks lead to big gains, and here’s why.

As I mentioned above, all penny stock is trading at or below $1. So even moving just a few cents can be big percentage gains.

For example, say the stock only moves from $0.10 to $0.50, you would 5x your money. And this is the kind of thing you hear a lot of the penny stock guys hyping up. The fact that these stocks are so cheap you can see massive percentage moves very quickly.

So as you can see, there is something that you could look at as pros to trading penny stocks. Or at least these are the common ones that the “gurus” are focusing on 

The cons of trading penny stocks

Now, let’s talk about the cons.

What are the cons of trading penny stocks? Well, often when you’re trading penny stocks, it’s a pump and dump scheme.

Now, you might have heard about this, but I want to explain to you what that means, what a pump and dump scheme is.

And in order to do this, I want to actually show you some very specific examples. Let’s take a look at RobinTrack.

So RobinTrack is a website that actually tracks how many Robinhood users have a certain stock in their portfolio.

And one of the popular penny stocks that Robinhood users like to trade is BIOC, Biocept.

So you can see right now around 70,000 Robinhood users own BIOC (at the time the video was recorded).

More and more Robinhood users started putting Biocept into their portfolio.

Looking at the price, the red/pink line that you see is the current price, and the green line is the amount of Robinhood users who own this stock.

So I want to zoom in here, to earlier this year because I want to show you exactly what happened.

This stock was trading around $0.32. And so if it is trading around $0.32, again, it’s easy for the stock to double because all it needs to do is jump from $0.30 to $0.60 and it will be fine.

And as you can see, there is a day where this stock suddenly jumps up. It jumps from $0.28 all the way up there to $0.80.

So more than doubles. But here’s what happens, and this is why it is called a pump and dump scheme.

What does pump and dump scheme mean?

So obviously, some people said, “OK, you got to buy this.” I do believe that Biocept actually tweeted something around the coronavirus. Doesn’t really matter. This is when some people are jumping on it. But when do most people put this into their portfolio? After this initial jump is over.

You see right here, now that we have 32,000 Robinhood users having it in their portfolio, what happens afterward? The price goes back to this.

So why is this called a pump and dump scheme? Well, for a very simple reason. It is being pumped up.

These penny stocks are not traded at a regular exchange. These penny stocks are traded OTC, over the counter, so they are a little bit riskier. There are also fewer regulations for these penny stocks.

I don’t want to say that Biocept did it, I’m just using this as an example, but very often a company is actually paying people to send e-mails to thousands, and ten thousands, and hundreds of thousands of people and saying, “Hey, we have a stock that is really interesting.”

So what do you think? Do insiders buy the stock before they send the e-mail or after they sent the e-mail? Before the e-mail, of course, right? And this is why it’s called a pump. They’re pumping it up and then as soon as many users are buying it, then they’re dumping it, and this is where often users who are buying penny stocks are being caught buying it at the high.

I want to talk a little bit more about Biocept here. So let’s take a look at this stock.

As you can see, BIOC right now is trading at $1. It just recently, just a few days ago, jumped dramatically up again. So it’s being pumped up and as you can see then being dumped.

Now, let’s take a look at their earnings. Here is their annual income statement. You see it right here. So for the past four years, they have failed to make a profit.

So why would you buy a stock that has been losing and losing and losing and losing? I know, now you might say, “Hey, Tesla did the same thing and it is worth a lot right now.” Hey, every now and then it works. But most of the time when you see this here, you can look at the last four quarters.

The losses are accelerating. They are making a loss between six and nine million dollars every quarter, so it’s probably not worth a whole lot. So this is where you see the pump and dump scheme here at its best.

Now, let me show you another penny stock that’s very popular also amongst Robinhood users. It is TNXP. You can already see on the chart how the pump and dump works.

You see, here is where some insiders are buying it before they’re hyping it up. So they’re buying it here around $0.50, maybe $0.60. Then it is being hyped up often by spreading fake news or sending out hundreds of thousands or millions of e-mail.

It’s quickly jumping up from $0.58, all the way to $2.40. This is when the smart people who bought it before they sent the e-mails dump it when they quadrupled or quintupled their money. Then, as you can see, it comes quickly down.

Here’s another example. You see these spikes? Often when you see these, they are very typical for a pump and dump scheme. Some people are buying it before, then they’re spreading fake news or they pay people to send out hundreds of thousands of emails.

This is where it quickly jumps from $0.40 to what? Almost $2 here and then quickly comes back. Another e-mail blast. Boom. Pump and dump.

So let’s take a look at the financials here and then I’ll give you a summary of what I think you should do and how you could possibly make money trading penny stocks here.

Taking a look at the financials, you will see very similar results here. So the net income, what you see in green is actually negative.

It’s minus 40 million in 2016.

Minus 21 million in 2017.

Minus 26 million in 2018, and if you look at the quarterly, you see it’s not getting better. They’re also burning through 6 to 9 million dollars every single quarter. So be aware when you are trading penny stocks that often you could fall for a pump and dump scheme.

Summary

So first of all, when trading penny stocks most of the time, keep this in mind, you are gambling.

And this is where most people just say, “Yeah, you know what? I put $500 into this or $1,000 and if it works out, then I’m 5x, 10x, 100x my money here.”

So the approach that most people who are trading penny stocks are using is the so-called spray and pray approach.

This means they’re buying a lot of them and all that needs to happen is that one of them is actually taking off here.

Now, take a look at the financials, because you will see that most penny stocks are junk.

You see, if they have been producing losses over the past four years I doubt that this would be the year where it suddenly turns around.

Anyhow, every now and then, absolutely, you can catch a winner, but I think the odds are against you.

Now, you know me, I’m a big fan of that especially if you want to trade a small account, so if you don’t have a lot of money, consider trading options.

Trade options on regular stocks, because options also often only cost $0.50, $0.75, $1 so you can trade options and trade regular stocks.

Has this been helpful so that you know a little bit more of what is behind penny stocks, or should you be trading penny stocks?

If you enjoyed this, feel free to leave a comment below.

I have a few more articles in this series, you can check them out here:

Should You Invest In Bitcoin?

Should You Be Day Trading?