Why Penny Stocks is a Trader's Nightmare

12 lug 2023

Let me start off and say.

Penny Stocks have a lucrative and solid place for investors who buy and sell shares.

But not just any investors.

Well informed, researched, savvy and highly understand fundamentals.

Penny stocks for a trader though – Ah no!

Those shiny little nuggets of the stock market that promise vast riches for a small investment, can often turn into a trader’s worst nightmare.

Here’s why…

Reason #1: The Roller Coaster Ride: High Volatility

Penny stocks are notorious for their high volatility.

One day they can skyrocket and plummet the next.

These stocks are like riding a financial roller coaster without a safety harness.

No matter where you put your stop loss, it can trigger within a second.

And this extreme price fluctuation, can be dangerous for traders.

The unpredictable nature, can lead to rapid and substantial losses.

Reason #2: Stuck in Quicksand: Low Liquidity

Volume is another caveat.

Liquidity refers to the ability to quickly buy or sell (flow in and out) of a stock without significantly impacting its price.

Penny stocks often lack this characteristic.

Some penny stocks volume is SO low, that it can take months or even years to move in price.
This means, once you’re in, you might find yourself unable to exit your position.

Instead of flowing in and out of a trade (like a blue chip), you’re stuck in quicksand. Quite the oxymoron!

Without a healthy volume of trades, penny stocks can become a trap, a nightmare for any trader.

Reason #3: Walking a Tightrope: High Chance of Bankruptcy and Liquidations

Investing in penny stocks is akin to walking a financial tightrope.

These companies are often at a higher risk of bankruptcy and liquidation.

This is because of their lower levels of regulation, credibility and inherent instability.

And the issue with a less regulated penny stock company, is that it allows for less transparency.
This makes it difficult for investors to drill into the true company’s health.

The high risk of bankruptcy further amplifies the nightmare.

Reason #4: Battling with Giants: Lacking the Strength of Blue-Chip Companies

Penny stock companies are typically not well-established businesses.

They lack the strength, stability, and track record of blue-chip companies.

And without you doing the right research, it can leave them susceptible to market fluctuations and economic downturns.

Investing in these companies can feel like bringing a pebble to a boulder fight.

You’ll struggle to hold your ground amidst giants.

Reason #5: The Race to Zero: The High Failure Rate of Penny Stocks

It’s an unfortunate reality.

Most penny stocks are more likely to crash and burn than to soar.

Because of their weaker fundamentals and instability, they are more likely to head to zero – than a blue-chip company.

So let’s sum up the reasons why penny stocks is a traders nightmare:

Reason #1: The Roller Coaster Ride: High Volatility
Reason #2: Stuck in Quicksand: Low Liquidity
Reason #3: Walking a Tightrope: High Chance of Bankruptcy and Liquidations
Reason #4: Battling with Giants: Lacking the Strength of Blue Chip Companies
Reason #5: The Race to Zero: The High Failure Rate of Penny Stocks

If you’re a savvy investor or you have someone great to follow, go for it.

But I’ve warned you about the dangers for a trader.