To say I’ve only watched “The Wolf of Wall Street” a million times would be a gross understatement. Mesmerized by the story of Jordan Belfort, making millions as a broker, was the very catalyst that kicked off my interest in investment and the world of trading. Today we’re going to break down the wolf’s medium of wealth and modus operandi: The Penny Stock Market. Penny stocks are shares in companies that trade for — you guessed it less than one dollar. They are often small, speculative companies listed on the over-the-counter market, a specialized trading platform for securities that don’t meet listing requirements for exchanges like the NYSE. Over-the-counter or OTC exchanges for short don’t require as much transparency when it comes to information like a company’s assets or growth rates, key indicators that are often used by analysts. Taken for face value one might then find that the lack of transparency would mean Penny Stocks are all risk and no reward. However, it’s in this murky world that you’ll find a surprising key to success and that’s leveraging the high volatility to turn a profit. But before you dive head first into an investment in penny stocks let’s break down the microcap market.
If you load up Finviz today and search for the top 10 movers, chances are at least half will be penny stocks. That’s because with great power comes great — sorry wrong script, with great risk comes great returns. Because Penny stocks are so cheap to purchase, the barrier to entry is low and the volume of such trading can be astronomically high. In large-cap markets, macroeconomic conditions will often dictate how things move. Like the steady ebb and flow of a wave, sure fantastic earnings for one stock may temporarily boost it as investors readjust to its new valuation but more often than not it will eventually fall in line with its sector. Conversely, the penny stock market is much more erratic, any particular event from a company’s earnings to a change in CEO or the signature of a new deal can grossly impact the value of microcap security and send it… to the moon. It’s this volatility that investors in the microcap market will want to harness and bet on.
Another benefit of investing in penny stocks is that you can get in early on a company with considerable potential. Buying shares when they are still relatively low can be smart if you believe in a company’s long-term prospects. This is generally not the best type of strategy if you’re going for short-term swings based on technicals, rather it is rooted in traditional value investing. Although OTC markets might not require as much diligence when it comes to financial reporting if investors are particularly excited about a company’s prospects you can bet that they’ll stay for the long haul. Fledgling companies that may not have the assets to be listed on major exchanges can still be diamonds in the rough if they are involved in bleeding-edge technologies like AI, automation, or biotech. Alternatively, microcap companies could be piloting new experiments in healthcare or exploring potential locations for mining. Doing the correct research and finding these growth-stage companies isn’t an easy task but if you don’t hesitate to pull the trigger on a penny stock security — after all you’ll never know what makes it big
Lastly, investing in penny stocks can also be a great way to learn about the stock market. Penny stocks are often more volatile than other types of stocks, so you can get a crash course on how the stock market works by investing in them. A fantastic way to use penny stocks as an education medium is to first paper trade these securities. Risking nothing allows you to learn fundamentals without diving head first. You can also utilize platforms like Xtrades to follow analysts with specialties in microcap securities. Built on a foundation of collaborative trading, Xtrades will allow you to carefully choose from different analysts and veteran traders by analyzing their data, trading styles, and win rates. Xtrades analysts will additionally do daily breakdowns of their top trades within the platform and discord server, teaching fundamentals in technical analysis and trade setups. By leveraging these resources you can learn to apply the same trading fundamentals to the Penny stock market and find runners before they rocket.
As we conclude our journey exploring the why of penny stocks (more on the how in part 2 👀), I’m reminded of a story I once heard. It’s the tale of a young man who stumbled upon a small, struggling fruit company in 1982 and decided to invest a small sum of money into it at just $0.04 a share. He didn’t have high hopes for his investment, but he was willing to take a chance. As time went on, that company grew and grew until it became a household name and at one point the most valuable company in the world — Apple. That’s the story of Jordan, one of the senior analysts at Xtrades, who took a measly 4000 and turned it into 17 million (6 Zeros!). The thing is his story is not unique. There are countless examples of individuals who have made incredible returns by investing in penny stocks. Of course, there are risks involved, but with the right strategy and due diligence, the potential rewards can be significant. So, if you’re willing to take a chance and do your homework, penny stocks may just be the key to unlocking your financial dreams.
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