Penny stocks have been called as evil by many who do not understand their amazing potential. There are many reasons why Penny stocks have a bad rep. Today, let’s explore the top 4 reasons why penny stocks are called evil, and why they actually aren’t!
#1 Penny Stocks are easily manipulated
This is one of the main reasons for the negative connotation associated with penny stocks.
The Truth: The fact of the matter is that many traders and investors just use manipulation as the excuse for justifying their poor trading decisions.
There are many large investors who try to keep a stock at pennies by spreading false rumors about price manipulation. It is always best to investigate further about the penny stock before taking such rumors at face value.
Chances are, there is going to be a huge rise in the penny stock’s price once the actual news about the big development or product of the company is unveiled.
#2 Penny Stocks are scams because they give no dividends
Most of the penny stock traders think that the penny stock companies do not give dividends. They consider this as proof that the company does not give out their profits to the shareholders. This is not true at all.
The Truth: There are many penny stocks that give dividends. In fact, there are penny stocks that give monthly dividends too! A careful search can yield many such dividend-paying penny stocks.
There are many websites that give a list of monthly dividend stocks, among which there are many penny stocks as well.
#3 Penny Stocks have a lot of short interest
One of the most common criticisms about penny stocks is that in spite of having a large number of institutional and insider ownership, the number of shares short is quite high.
The Truth: Many times, high-level investors look for companies that have a potentially high future value. Then, they short such penny stocks and create promotions to encourage people to short stocks. This slowly results in a self-induced short squeeze.
If you identify such short squeezes early, you can easily make huge profits from low-risk trades. In case you are someone who is a technical trader, you can quickly identify these short squeezes using Bollinger bands. Popularly known as ‘Bollinger Squeeze’, this phenomenon can help in forecasting the big moves in the penny stocks before it happens.
If you are a fundamental trader, you can check out the value of ‘Float Short’ on the stock screener that you use. Choose the stocks with a high percentage of shares that are short. The best among them would usually have an up-day. Such stocks are ideal for short squeeze candidates.
#4 All Penny Stocks are basically pump and dump schemes
This is possibly the worst allegation about penny stocks. Yes, it is true that there are many penny stocks that are pump and dump stocks. But that is not true about all of them!
The Truth: Some of the past performances of penny stock could give no indication of its future trajectory. For instance, a biotech stock could soar based on the increase in demand for certain medicines!
As you can see, all rumors about penny stocks need not necessarily be true!