The markets are dead.
Despite economic uncertainty under the Trump regime, growing geopolitical tensions, and the Federal Reserve Bank on a quest to raise interest rates. Market volatility has been almost non-existent.
According to Goldman Sachs strategist, Krag Gregory, Q1 marked the lowest VIX on record– the market’s barometer for fear.
The lack of volatility has hurt traders, who thrive off it in order to make short term profits.
However, volatility is not dead for all sections of the market. In fact, you’ll find plenty, if you just know where to look.
Penny stocks refer to companies that publicly trade for $5 (or less); and have a small market capitalizations.
For example, Stein Mart, Inc. (SMRT) qualifies as a penny stock because it trades for $5 (or less) and has a small market cap.
On the other hand, Lloyds Banking Group plc (LYG) trades for less than $5, but has a market cap of more than $50B. LYG does not qualify as penny stock because it’s a large company.
Penny stocks are traded on the New York Stock Exchange, Nasdaq, and on the Over-The-Counter (OTC) markets.
Companies that trade on the New York Stock Exchange and Nasdaq must adhere to high standards of legal, accounting and compliance practices. In addition, they must meet certain financial and liquidity requirements. For example, here are just some of the listing requirements for a Nasdaq security:
Now, if you’re a company in its developmental stage, meeting these requirements might be too difficult. However, listing on the OTC markets can be a viable alternative.
There are three tiers to the OTC Markets: OTCQX, OTCQB, and Pink Markets.
Source: OTC Markets
For the most part, when you read about penny stocks, they often refer to companies that are listed in the “Pink” markets. These companies don’t have to adhere to the same type of scrutiny as Nasdaq, NYSE, OTCQX, and OTCQB listed stocks.
In fact, there are no listing requirements that need to be met by a “Pink” company. They have zero financial requirements, no shareholder approval rules, and they are not required to establish or maintain an audit committee. Very loose standards to say the least.
The OTC Markets attempt to do their best on informing investors on questionable securities. For example, if you see a skull and crossbones next to a stock symbol like this:
Source: OTC Markets
It doesn’t mean the company is part of a secret society. Rather it stands for buyer beware. The security might have been involved in a shady stock promotion or spam campaign. Even worse, the company’s insiders might be under investigation for fraudulent activity; the company could be facing regulatory suspensions or disruptive corporate actions.
Here’s another example of how the OTC tries to inform investors:
Source: OTC Markets
This could eventually lead to suspension, like it did for Gambit Energy, Inc.
Source: OTC Markets
Now, just because a stock is classified as “Pink”– doesn’t mean it’s a bad company. You just need to do your research, like you do with your other investments. Thankfully, OTCMarkets.com puts labels and warnings, allowing us to quickly identify the status of a security.
In the end, companies only hurt themselves when they’re not transparent with investors.
Why do penny stocks offer so much opportunity?
- They are not covered by an army of analysts.
Apple has about 40 analysts covering the stock. It’s hard to surprise investors when analysts are updating them on a regular basis on what to expect in the name.
On the other hand, Nexvet BioPharma PLC (NVET), a penny stock which saw it’s stock price surge 63% on April 13, 2017, after Zoetis announced that they will be acquiring them. At the time, NVET had about two analysts covering the company stock.
The trickle-down effect is that penny stocks are more reactive to news. For example, check out this headline which sent Plug Power Inc.’s (PLUG) stock price soaring:
That news release pushed PLUG’s stock 75% higher in the pre-market and to 52-week highs. Days following the headline, the stock would be up over 100%
On the other hand, check out this headline about Apple:
Source: Business Insider
Apple is such a large company that they literally have to find new markets to enter in order to grow. Despite, this exciting news from the company, it’s unlikely to move the stock price substantially in the near term.
It’s no surprise when you look at the top gainers and losers, they largely consist of penny stocks.
What are some good resources for finding penny stocks to trade?
Finviz.com: This website allows its users to create screeners and watch lists for Nasdaq and NYSE listed securities. For example, the screener tab allows you to customize a list of stocks based on a number of categories that include: exchange, market cap, float short, relative volume, industry, price, p/e, price/cash, insider ownership, debt/equity, long term debt/equity, and volatility– just to name a few.
For example, here is a list of the top gaining small cap stocks on the day, that are trading under $5 per share.
Imagine some news hits the tape that the government plans on loosening regulations in the healthcare sector and all stocks in the space should benefit. Instead of scrambling to find stock symbols that will be impacted, you go to your healthcare watchlist and start trading. This type of preparation can mean the difference between making a little bit– to making a lot.
Shameless Plug Warning: SmallCapStocks.com : Our website covers small cap stocks and even provides a watchlist of movers before the market opens. It’s great if you’re in a rush or looking for actionable plays.
OTCMarkets.com: This website is the home for the OTC marketplace. Here you’ll find nearly everything you want to know about OTC stocks. Their market activity page informs traders on the most active, advancers, decliners, and most updated stocks.
Type in a stock symbol and you can find even more information. For example, check out the symbol CBIS below:
They basically cover everything you need to know to do proper due diligence on an OTC stock.
Some other useful sites include:
Twitter.com: Good for getting a perspective on sentiment via social media.
Yahoo! Finance: Has many of the same features as OTCMarkets.com. However, some may like their layout better.
Some financial professionals may discourage you from trading penny stocks because of the risk factors involved. However, in a market that is desperate for volatility, penny stocks shine the brightest. Sure, volatility can be a double-edged sword… be careful what you wish for, you may get it. Not all penny stocks take you down a dark alley. In fact, many of them do offer enough transparency for you to make informed trading decisions.