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Active Penny Stocks

Updated on October 1, 2009

Active Penny Stocks

There are both fantastic rewards and considerable risks involved when you’re trading active penny stocks. The term “active” may throw some people off if they’re not aware of the role that volume plays in penny stock investing. To summarize it in the briefest way I can muster, basically high volume equals an active stock. What this simply means is that the more shares are trading hands on a daily basis, the more “active” the stock is, which results in greater liquidity, which also can mean a better probability of you being able to enter and exit your trades at the price you prefer rather than whatever the market feels like handing to you. One thing to note especially with trading OTC penny stocks is that the volume can be very “herky-jerky”, and many times this is a result of market manipulation, along with other factors. It’s best to stay away from a stock that has very little to zero volume for a few consecutive days in a row, and then all of a sudden it spikes in price, and the shares traded that day are in the millions…this is usually a sign of some “funny business” going on behind the scenes (pump-and-dump, anyone?). In the case of penny stocks, you definitely want to see volume in the tens of millions of shares a day on average, primarily due to the very low price per share. Think about it: If Google (ticker: GOOG) was trading only 1,000,000 shares a day, that could be considered relatively low, but when you consider the price per share (well over $200.00 on average as of this writing) it’s not improbable. However, if a penny stock traded only 1,000,000 shares in a day, and the price per share of the stock was only $0.01, the total cash value of all that trading activity was only $10,000, which (relatively speaking) is not that impressive. So you definitely want to see much more trading activity with penny stocks, and it should definitely operate on a “sliding scale” of a sort; in other words, the less money the stock costs per share, the more volume you should see.

Image courtesy of abcnews.com
Image courtesy of abcnews.com

Finding Active Penny Stocks

As far as finding active penny stocks goes, the best way to do it is with an online stock screener. Most of the exchange websites such as the NASDAQ and the OTCBB have built-in screeners that allow you to sort stocks by volume and price, so they make it fairly easy for you to do research on penny stocks with “lively” volume. So why all the fuss and curiosity about active penny stocks? Because they represent the classic “American dream” of getting a hot tip from the shoe shine boy or whatever, then buying a stock for hardly more than a song, and watching the price per share soar to imperceptible heights. Most people by nature have the “herd mentality”, and everyone wants to be where the “action” is. This is true with the stock market as well; people love to jump on a stock with high volume and lots of CNBC and Bloomberg pundits singing its praises. In the penny stock arena, this can happen when a stock gets heavily promoted through those famous glossy newsletter-style solicitations that I’m sure all of us have received in the mail from time to time, as well as through the famous fax blasts that rave about the next big mining or biotech or security company that’s going to triple in value over the next six months…we’ve all heard the spill before. But going back to my point about people loving to be where the action is, I’ll never forget something I read about Warren Buffet…he talked about how investing in the stock market requires us to make somewhat counterintuitive decisions, because again, naturally everyone wants to jump on a stock while it’s “hot” and everyone’s buying it, but that’s actually usually the most inopportune time to buy it. Buffet stated it this way (and I’m paraphrasing): In order to achieve success in the stock market, you have to learn how to be fearful when everyone else is being greedy, and you have to learn how to be greedy when everyone else is being fearful. Now remember, this is coming from one of the richest people on the planet, so I’m inclined to believe what he’s saying. The bottom line is that while trading active penny stocks can virtually guarantee you some well-filled entry and exit orders due to the high liquidity, as with any other investment vehicle, I would definitely slap a big “caveat emptor” (buyer beware) sticker on this one before turning your hard-earned money over to the mercy of the markets.

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