Penny Stock Is Worth Millions: Signs

Few investments in the stock market carry a higher level of danger than penny stocks. The prices of these equities, which trade for less than $5 per share, are often set at that level for a compelling reason. A once-thriving firm that is now on the verge of bankruptcy or that has been forced to de-list from the major exchanges and is now trading over-the-counter may, for instance, be the owner of a penny stock that is now trading OTC. It's also possible that the firm is brand new, in which case it has a limited market history and still needs to satisfy the requirements to be listed on a major exchange.

It's common knowledge that penny stocks are volatile, dangerous, and open to price manipulation. However, investors willing to take on many risks may make a lot of money off a penny stock. You would be a happy investor today if you purchased shares in MNST in 1996, when it was selling at $.04 a share since Monster traded over $66 in 2020. If the prospect of such exponential returns has piqued your interest, it could be worthwhile to wade into the murky waters of the penny stock market.

Check the Fundamentals

Before taking a risk on penny stock, investors should do extensive research and due diligence on the company. For instance, investing in the financially troubled Walter Energy Company was a solid option at the time. After all, a share of Walter Energy reached a high of $143.76 in trading in 2011. However, investors who acquired Walter Energy stock when it dropped to $0.16 would have still lost money since the business filed for bankruptcy not long after. On the other hand, an investment in Inovio Inc. (INO), trading for less than one dollar in 2008, provided investors with many chances to get rid of their positions for more than ten dollars in 2009 and 2013 through 2020.

The fundamentals of the companies behind these two stocks couldn't be more different. The metallurgical coal industry was getting on in years and becoming vulnerable to cyclical demand and political influences. Walter was an established firm in the industry. When global leaders announced promises to reduce greenhouse gas emissions, this put further downward pressure on Walter Energy, which was already suffering from a worldwide coal supply glut and weakening demand from China. This added pressure caused Walter Energy's stock price to fall even more. In the end, Walter successfully sold its assets to two separate businesses in 2016.

In contrast, Inovio is a speculative biotechnology play with strong relationships in the cancer vaccine portfolio it developed, providing a high potential for buyouts. As of 2020, a takeover has yet to be completed, but the stock price continues to drop, followed by large gains that go almost as fast as they were achieved.

Industry Life-Cycle Analysis

The stock in penny stocks should undertake an industry life-cycle study and evaluate the balance sheet of a firm they are considering investing in. Some firms trading on penny stocks is engaged in a stock still considered to be in the "pioneering phase." This early phase is distinguished by the existence of a large number of rivals of a relatively modest scale in the market area, the introduction of innovative items and ideas, and a relatively low level of customer demand for the products.

The "growth phase" comes after this first development period, "in which many of these enterprises get increased market attention, ultimately leading to a skyrocketing increase in their sales and demand. A good illustration of this is the boom in the technology industry in the late 1990s, which was followed by a collapse. When the Internet was still a relatively new notion, investors were eager to purchase anything that had any connection to the Internet. As a result, many firms in the technology industry began their existence as penny stocks but later saw their market caps and prices skyrocket.

Penny Stock Industries

It should be no surprise that markets that provide just two possible outcomes for most of their firms will have an abundance of penny stocks. The biotechnology and resource industries are the most common places to find binary outcomes, sometimes known as "make or break" speculative bets.

During the commodities boom of the 2000s, the Canadian TSX Venture Exchange was home to many resource-based penny stocks that saw significant price appreciation. After that, the festivities ended, and most of the stocks collapsed to zero, much as many technology firms did in the crisis of 2000.

On the other hand, traders may still profit from organizations operating in the binary options space when market circumstances are favorable, such as when commodity prices are rising. However, investors in these sectors need to be aware that the stocks may collapse as rapidly as they can soar. This is a risk they must accept.