Who Trades or Invests In Penny Stocks?
Speculation is the lifeblood of the penny stock market. Yet before any major selling can commence, a great deal of buying has to take place to inflate a penny stock's price. And much of this buying comes from long-term speculators who are well-versed in the game and have profited from successful penny stock trades in the past. These players continue to speculate in the hope of repeating earlier successes, but there's usually a limit: those who incur steep losses will likely stop trading penny stocks after long.
9) Ordinary investors
Even experienced "traditional" investors will occasionally succumb to the lure of making a quick buck from a supposedly hot tip on a penny stock. It could be a friend or acquaintance who professes to be on the inside track with the penny stock's promoters, or the investor might be convinced by a skilled newsletter writer who has crafted a solid-sounding investment angle. These investors may dabble in the penny stock market once or twice but once they sustain some losses, they're likely to call it a day and stick to trading what they know best: blue chips and senior securities.
10) Inexperienced and unwary investors
Then there are neophyte investors who believe they can strike it rich in penny stocks. They're entranced by the idea of buying 10,000 shares of a 10-cent stock for only $1,000 and, once this 10-cent stock hits just 15 cents, they'll have made a neat 50% return on their investment. The hard reality, however, is that such a pricing move is quite uncommon. Even if it does occur, wide bid-ask spreads and limited trading liquidity often prevents the investor from making a quick sale to close their position and lock in profits.
Plenty of people trade penny stocks daily, but remember that the number of penny stock sellers dwarfs that of buyers, and that only the experienced survive for long in the sector. If you do yield to the temptation to try your luck in penny stocks, you should treat your investment as a very short-term trade rather than as any sort of long-term strategy.
Elvis Picardo can be contacted at Global Securities Corporation