How to Responsibly Invest in Penny Stocks - InvestingChannel

How to Responsibly Invest in Penny Stocks

Proprietary Data Insights

Top Stock Searches This Month

0 1 2
Rank Name Searches
“#1” Tesla “913,680”
“#2” Apple “796,506”
“#3” AMC Entertainment “738,918”
“#4” Eversource Energy “708,575”
“#5” American Virtual Cloud Technologies “656,226”

Today, The Juice details the three most important factors to consider before trading a penny stock or any low-priced stock, for that matter. 

But first, what exactly is a penny stock, by itself and relative to other low-priced stocks? 

A typical definition of a penny stock is a stock that trades for less than $5 per share. Not a bad definition, but not ideal. 

We like the SEC’s definition: “Penny stocks are low-priced shares of small companies.” 

Surprisingly, the penny stock we alerted you to the other day American Virtual Cloud Technologies (AVCT) continues to crush it in our proprietary Trackstar database of the tickers generating the most investor interest. It’s holding steady at #5 among all stocks

Just the other day, AVCT traded for around $0.30. Suddenly, on Monday morning, it opened around $4.50 and promptly plunged to $2.37. 

What happened? 

A 1-for-15 reverse stock split, which does nothing to AVCT’s market cap. All it does is decrease the number of outstanding shares, thereby increasing the company’s stock price. AVCT did this to avoid a Nasdaq delisting, which can happen if the stock stays under $1 for more than 180 days. 

The move didn’t fool investors. They sold off AVCT. 

However, if the opposite had happened, and AVCT moved past $5, would it cease to be a penny stock? We think not. Even with its nearly $300 million market cap. 

Just as, say, Bed Bath & Beyond (BBBY), with a roughly $500 million market cap, doesn’t become a penny stock if its shares drop below $5 – a very real possibility. 

BBBY – pathetic and struggling yes, but a known entity with seemingly more ways out of its present pickle than AVCT. 

So we hesitate to assign a rigid definition of penny stocks. We’ll stick with the SEC’s imprecise but practical one: low-priced stocks that usually, though not always, have small market caps. 

This definition casts a wide net. But this is okay. Better to not overlook a potentially risky trade when dealing with this type of speculation.  

No matter how you define a penny stock, proceed with caution on stocks that are low-priced (sub-$5 or even sub-$1), have small market caps, or both. There’s usually something going on behind the scenes keeping share prices so low.

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Investing in Penny Stocks

How to Responsibly Invest in Penny Stocks

Key Takeaways:

  • Some, but not all, penny stocks are press release scams. 
  • Owning a large number of shares doesn’t make you a baller. 
  • You need to be able to get in and out of speculative trades quickly and efficiently. 


While the list could go on for a while, The Juice thinks these are three of the most important factors to consider when trading stocks in the penny and low-priced universes. 

Press Release Wonders. Anybody can publish a press release. If you’re researching a company and all you can find are press releases with imprecise claims and half-hearted, uncertain outlooks on the future, stay away. 

Some companies issue press releases to drum up interest. While they may have good intentions, if it’s absent hard news and solid numbers, that’s a red flag. 

Same goes for social media buzz minus anything resembling substance from the company’s investor relations department (assuming they have IR!). You could be looking at a pump-and-dump scheme where groups of traders   sometimes more methodically than others pump shares on hollow hysteria, leaving unsuspecting investors who got in at or near the top holding the bag. 

Size Doesn’t Matter. It’s psychologically tempting to take your $1,000 and buy 5,000 shares of a $0.20 stock. You don’t feel like nearly as big of a baller using that grand to secure 0.6657 shares of Chipotle Mexican Grill (CMG)

Here’s the reality. 

Five years ago, CMG traded for $308. Today, it’s around $1,500. Chipotle has a better chance of returning another 390% over the next five years than most penny stocks. If it does, your $1,000 investment becomes an impressive $4,900 or so by 2027. 

This isn’t to say CMG will do this or penny stocks can’t. It’s just to say you should invest most of your money in well-established, best-of-breed firms. Put what you’re more willing to lose in more speculative names, which can include a penny stock or two. 

The Spread. Some low-priced stocks are thinly traded. Low volume often means a big gap between the bid and ask price of a stock, or the spread. 

The bid represents the highest price traders are willing to pay for a stock. The ask represents the lowest price they’re willing to sell it for.

Stocks that trade heavy volume tend to have tight spreads. For example, late Monday, Apple (AAPL)’s bid was $142.70 versus an ask of $142.71. 

It’s common to see much wider spreads on low-volume stocks, which sometimes are temptingly cheap. You risk losing money when you sell a stock like this simply because the bid is significantly lower than the ask and market price of the equity. 


The Bottom Line: Do your due diligence on all investments. Do it twice on low-priced and small-cap stocks with no track records or spotty histories. 

While we all want the trading and investing equivalent of easy money a quick multibagger it’s the Apples of the world that reliably make you money in the stock market. This type of success doesn’t happen overnight. 

This doesn’t mean you shouldn’t speculate on relative longshots. It’s all about balancing risk not only with reward, but alongside a long-term strategy that helps you reach your big personal financial goals. Things such as buying a home or securing a comfortable retirement. 

Any investing activity that puts these things at risk calls for moderation and a cautious eye.

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