You might be interested in penny stocks because of their low price or the mostly unregulated manner in which they’re marketed and sold, providing a feeling of ‘freedom’ that strictly regulated securities and exchanges do not deliver. But you must keep in mind the biggest drawback of penny stocks.
Penny stocks are hard to sell, which means you can’t sell them any time. For an over-the-counter sale of stocks, you need to find a willing buyer who agrees on the price you like. Using the right broker, you can get around this obstacle and sell the most stocks though not at an ideal price.
This article will explore liquidity alongside the three reasons penny stocks are hard to sell. You will also learn about the things to keep in mind when trading penny stocks so you do not end up regretting your decisions. Finally, you will learn about alternatives to penny stocks that are relatively more liquid.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Liquidity?
As you may have noticed, much of the negative talk surrounding penny stocks has to do with liquidity. Liquidity refers to the ease with which you can sell an asset at any given time.
Generally, assets that command a massive price are relatively illiquid. An example of this would be a large mansion. Despite being valuable, the asset can’t be immediately sold for what it is worth unless a buyer is around.
Why Do Penny Stocks Have Limited Liquidity?
If the number one contributor to the rigidness of asset liquidity is its price point, one may wonder why something as cheap as a penny stock is hard to sell.
Fewer Buyers
Penny stocks that are traded over the counter command a small price but remain illiquid because of a lack of willing buyers’ access. Buyers avoid penny stocks because investing in highly speculative assets comes with inherent risks. Ironically, a part of why penny stocks are hard to sell is that they are hard to sell. Traders avoid penny stocks only because other traders avoid penny stocks too.
High Commissions
Since a huge part of selling penny stocks is finding the buyers, stockbrokers command a much higher price for penny stocks than regular stocks. This makes for yet another reason why people avoid buying penny stocks altogether. Who wants to buy an asset they’d have to pay a massive commission on when they sell?
Less Press Coverage
While major business programs, newsletters, blogs, and websites cover the hot stocks, most of them leave out penny stocks to keep negative associations at bay. By not reporting on the potential value their audience can get, major financial news organizations keep the penny stocks market under wraps.
Negative Media Coverage on Risks
As if a lack of press coverage on individual stocks wasn’t enough to keep the penny stocks market small, there is significant negative coverage surrounding penny stocks because of a few bad apples in the niche. Since most journalism involves outlets mimicking each other, a few stories have gotten amplified into hundreds of recycled articles. Anyone who comes across these sensationalized stories is a little more likely to dismiss penny stocks.
Navigating the Penny Stocks Landscape – Things to Keep in Mind
With the above established, let’s be clear that there is significant money to be made in penny stocks provided that you have the right strategy and guidance. When trading penny stocks, you have to keep the following factors in mind and optimize your strategy accordingly.
Listed Penny Stocks Can Fix Liquidity Issues
Penny stocks may commonly refer to ones that cost less than a dollar, but it isn’t uncommon for stocks worth $5 or less per share to be referred to as penny stocks as well. If you wish to stay liquid with your penny stocks and have the ability to sell them at any given point, you should purchase your stocks from one of the major exchanges like NYSE or NASDAQ.
More importantly, since this isn’t an over-the-counter transaction, you’re not likely to pay as high a commission. You can also use zero-commission platforms to shop these penny stocks.
The Virtual Zero Dollar Value
When a stock price goes below the minimum threshold, many exchanges may move to delist them. Most stocks that trade at an average of $3 per share are at a high risk of becoming exclusively over-the-counter stocks. When a stock you’ve bought gets delisted, it has a virtual $0 value unless you find a willing buyer. So be careful buying shares that go below $3 for the majority of the month. They are at risk of becoming highly illiquid.
Associate With the Right Broker
If you choose to trade penny stocks over the counter, you’ll have the advantage of buying larger quantities of shares for three to five dollars. However, you’ll need to associate with the right broker who has a track record of making money for clients. While the way your broker finds out about potential price hikes and future appreciation isn’t mandatory for you to know, you must do thorough research to find out whether the broker is legitimate or in it for the cash.
Here are a few things to look out for:
- Fake reviews. Any broker who leverages fake reviews online isn’t ethical enough to trust your penny stock strategy advice.
- No testimonials. A broker without testimonials is a broker hiding a trail of disappointments.
- No mention of risks. If your broker does not bring up the risk associated with a specific buying decision, he prioritizes his cut over your general profitability.
Don’t Take Positions You Aren’t Willing to Hold
You must never set your strategy without a backup plan in the instance that you’re trading over-the-counter penny stocks. Make sure to have a contingency plan for when a stock you bought has no buyers at the point you wish to sell. You can hedge your bets and reduce the overall amount of your loss in case there is a stock that becomes illiquid for a long time.
Alternatives to Penny Stocks
If you’ve read the article so far and seem to err on the side of avoiding penny stocks, you can still invest small sums in assets that appreciate in value. Below are some such investments.
Crowdfunded Real Estate
Crowdfunded real estate has emerged as a promising phenomenon where the benefits of real-estate appreciation reach the common-man investor who can not afford to buy a large property. Though platforms like RealCrowd offer stakes in properties for a small investment, it is significantly larger than what you require for penny stocks.
Crowdfunded Startup Investing
Startup investing is no longer for angels only. You can find many online platforms that offer you the opportunity to get in on the startup action with as little as five dollars. The idea is to have multiple individuals pool together their small contributions to help fund the first phase of start-ups. This would give them a small stake in the business which could be worth a lot more if the start-up evolves into a unicorn.
Smaller Quantity of Blue-Chip Stocks
Most penny stocks are not a risky investment in small amounts. However, when investors buy five thousand dollars worth of penny stocks, that’s where the risk doesn’t make sense. That is because the same investment would get them access to blue-chip stock, albeit in a smaller amount.
But ultimately, the number of shares does not matter because the money you make is on the price appreciation. A hundred shares going up a cent each and a single share going up by a dollar have the same impact.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
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Conclusion
When you hear someone say that penny stocks are hard to sell, keep in mind that this refers to stocks sold over the counter. As long as you invest in small amounts and buy stocks listed on NYSE and NASDAQ, you’ll be able to sell what you’re holding at relatively short notice.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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