Just like mid and large cap stocks, there is no limit to how high a penny stock can go.
Many massive, well-established companies were once trading for less than $5 per share.
Some of these companies include Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Ford (NYSE: F), General Motors (NYSE: GM) and Advanced Micro Devices (NASDAQ: AMD).
People who put money in these corporations during their penny stock days could have made a large fortune over time. But what is a penny stock and how high can a penny stock go?
What is the meaning of a penny stock?
Penny stocks are the shares of companies that trade below $5.
Generally, these stocks have low share prices. They are also seen as highly volatile and risky stocks with the possibility of significant growth.
Their allure comes from the power to buy more shares with less money. The low share price means the stock is likely to be a highly speculative security.
Why there are such big runners
The prices of penny stocks change every day by market forces of supply and demand. If more traders want to buy a shares of a penny stock (demand) than sell them (supply), the price of the stock increases.
On the flip side, if more traders want to sell a stock than buy it, there would be less demand than supply, and that would drive the share price lower.
But ultimately, demand for any stock is determined by how confident the market is about the prospects of that stock.
Analyst upgrades, high float, low short interest, upbeat quarterly earnings, and other positive news developments can lead traders to be willing to pay a higher price to buy shares.
Conversely, analyst downgrades, low float, high short interest, disappointing earnings reports, and negative news developments can cause traders to lose interest in a stock. Thus denting demand and forcing sellers to sell at lower prices.
How high can a penny stock go?
That is the question many traders are looking to answer.
Well, there is no ceiling on the price of a stock. Analysts says that penny stock companies don’t often grow up to become big companies, but it does happen.
For example, shares of Concur ran into some trouble during the “dotcom” bubble. Its shares tanked to $0.31 apiece in March 2001.
However, the company recovered and the stock traded as high as $107 by 2013.
In March 2009, shares of Pier 1 Imports were trading at $0.11 a share following the “Great Recession”. The company bounced back and the shares reached $20.64 in January 2014.
Why penny stocks can be risky
The penny stock market can be very rewarding for a diligent day trader.
But while these stocks have the prospect of high returns and rapid growth, they are also associated with a high level of risk. This is because the actual value of some company penny stocks may be difficult to determine because of a lack of valuation information.
According to New York Times writer Matt Phillips, “penny stocks occupy a low-rent district of Wall Street, a world rife with chicanery and fraud where companies that don’t a viable product, or a mired in debt, often sell their shares.”
Penny stocks tend to be newer companies that have not established history.
And unlike other stocks which are traded on centralized exchange, penny stocks are often traded on the over-the-counter (OTC). They don’t have a physical location and trades are executed via a broker-dealer network.
These also stocks face fewer rules about publishing information on independent board members or financial results. The lack of reporting on penny stocks means there is usually less competition as most stock traders will go for bigger companies.
Moreover, major stock traders don’t buy these stocks and Wall Street analysts don’t usually follow them.
Penny stock day trading strategies and profit targets
The reason some people love to day trade penny stocks is due to the fact that these stocks tend to be extremely volatile. Volatile stocks are the day trader’s bread and butter because they offer so many profit opportunities compared to stocks in a trend.
In financial markets, volatility refers to the range of returns over a given time period compared to the average return. This measure attempts to gauge the unpredictability of stock returns while ignoring trend and direction.
Day trading penny stocks is risky, but there is always the chance of finding one that can move 20-30% each day. These are the type of stocks that you can trade to make a living as a trader.
If you are looking to trade these stocks, we recommend you lean towards those that follow the following criteria:
- Float of less than 100 million shares.
- Strong daily charts i.e. above the moving averages and with no nearby resistance.
- High relative volume of at least 2x above average.
- A technical breakout or a fundamental catalyst such as a press release, quarterly earnings reports, FDA announcement, activist investors or some other kind of breaking news.
In addition, you need to set up your profit target and have a set of day trading rules that will be your guidelines to follow as you trade penny stocks.
Always make sure to trade with a proven strategy, use limit orders, have hard stops in, and max losses set for each day and each trade.
Bottom Line
In order to make decent profits when day trading these types of stocks, you need find those that have the potential to move sharply.
You also need to be able to find safe entries in real-time, not just in hindsight.
When trading penny stocks, you also have to be able to manage your risks and understand risk to reward ratios. Moreover, you need to create a trading strategy based on the best chart patterns and time of day to trade.
Through research, you can find and trade legitimate penny stocks and earn significant returns.
However, inexperienced traders are advised to tread carefully to avoid falling victim to penny stock pump-and-dump scams.