One of the major reasons for the immense popularity of penny stocks is its price. Specifically, the low stock prices of penny stocks. This low price makes Penny Stocks accessible to almost all investors and basically drive the penny stocks.
When Penny Stock prices start to increase, more investors are tempted to invest in the stock. This heightened demand further drives up the stock prices. This, in turn, causes an increase in the overall popularity of the penny stock and the circle continues.
But what exactly triggers the initial surge in the penny stock price? Here are the factors.
Major positive price drivers of Penny stocks
- Better than expected earnings reports or company revenue reports.
- A bullish market, causing almost all stock prices to surge.
- Appointment of a new CEO after removal of an unpopular CEO of the company
- Positive industry news and reports like expected growth in industry or commodity
- Commencement or increase in Dividend payments
- Joining of any major index, leading to attracting more institutional investors
- Rumors of takeovers
- News about share buybacks
- A surge in popularity of the underlying industry (for example, marijuana, 3-D printing)
- Increasing popularity of businesses which are in the same industry as the penny stock.
- Discovery of diamonds/gold/oil in the lands near to the penny stock owned lands.
- Mergers or contracts with bigwigs in the industry like Walmart, Microsoft, Google etc.
- Legal settlement wins
- Listing on multiple stock exchanges
- Approval of any products, FDA approval of any medicines etc.
However, be warned that the prices of Penny stocks are easy to manipulate when compared to larger stocks. This is because of:
#1 Low prices: If a penny stock is priced at $0.01 per share and its price increases to even $0.02 cents, the promoters and insiders would have already doubled their money.
#2 Thin trading: Many penny stocks are thinly traded. So any big purchases can cause the stock prices to inflate. Many insiders buy penny stocks and inflate its price, leading to other investors clamoring in for buying. Soon, the insiders dump the stock and walk away richer.
#3 Legitimate appearance: Many newbies to trading do not realize that, just because a company is listed on a stock market, it would be a legitimate and high-quality company. The truth is that there are many companies that near bankruptcy which is listed on the stock market.
#4 Anonymity of Owners: There are no stringent regulations when listing penny stocks. So, it is possible for owners to stay anonymous, make money through an artificially-created price surge and quickly exit the stocks.