If you are looking for other things to play with while the crypto market is hibernating, you could put to good use all those lessons you’ve learned from trading in the last years by looking at the underrated and widely forgotten penny stocks.
What are penny stocks?
First of all, if you are not familiar with the terminology, you should know that penny stocks are highly speculative instruments which trade below $5 per share. Some investors even go lower than that and only include in this category those shares which trade under $3 outside major market exchanges. Companies which can’t keep their stocks above $1 are sold exclusively over the counter. It is also called pink-sheets stock or OTC. There is a high risk related to the lack of liquidity and the fact that the regulatory standards are too light. Most stock traders would consider these stocks a gamble, but that is what they say about crypto too.
Lessons from the Wolf of Wallstreet
Even if you are not a fan of the blockbuster featuring DiCaprio, you should be aware of what the real Jordan Belfort was doing using penny stocks and which is now present in the world of ICOs. Belford mastered a pump and dump scheme. Himself and a small group of investors would buy an asset and artificially boost the price through marketing schemes which in the 80’s meant cold calling, or even e-mailing. After getting more people interested and buying, himself and the initial investors would exit the scene, leaving unsuspecting buyers with worthless stocks.
ICOs and penny stocks
Fast-forward 30 years later and enter the world of ICOs and blockchain. Not only is Belford’s scheme still viable, but it has also even become much easier to use because all the trading is online and advertising are automatized over social media channels.
ICOs are simple to launch, and although not all are frauds, those which are can be hidden very well. Apart from the whitepaper which can be very vague, you don’t need much. In the same manner for penny stocks, there is little available information regarding the financial data of the underlying company. Most companies listed in this way are under no regulation which requires proper financial reporting. If you decide to get into this market, you’ll have little knowledge about liquidity or the likelihood of a stock keeping its value. Investors accept these conditions in the hope that the shares will increase their value. In the case of ICOs, some issuers offer a lot of information, but not necessarily related to financial perspectives, most of the times it is all about the technology behind it.
Taking the chance
Both penny stocks and ICO investors are not always naïve or uneducated in the financial market. Sometimes they know and accept the risk, and those who make money out of these markets are most of the times well versed. They replicate Belford’s scheme over and over again, creating buzz around ICOs and dumping their stock on the peak.
If you are interested to learn more, Crediful released a guide on penny stock trading which provides some guidelines on what to do and what not to do when delving into the world of penny stock trading. The same principles apply to trading ICOs.
Using crypto trading knowledge to win at penny stocks
One can’t say that penny stocks are safer then ICOs or crypto. It is all connected to the underlying company. However, you could use a bit of you ICO and crypto-trading know-how to evaluate penny stocks. If you are already familiar with candlestick chats, you might find it useful in assessing these volatile stocks.
It would be best if you looked for clean charts, that means prices which are clearly moving in one direction with regular but brief changes which reverse. A clean bullish chart, for example, is going up; the price is steadily rising while a clean bearish is steadily dropping, usually after an initial hype or capital infusion. Although it happens, most price swings are not in the 100-200% range. It is more a matter of accumulating several 10-30% price swings that shooting for the 300% ones.
On the other hand, if you are going in for the game, you don’t want penny stocks which behave like bonds. If there is no movement or volatility, you are definitely losing. As in day trading, you need to have those swings to make money. Since things are changing from one minute to the other, there is no time to look into newsletters or press release. Those are usually mass manipulation tools which don’t help your cause.
There are two categories of penny stocks which are most similar to cryptocurrencies, especially bitcoin in its golden days. The so-called sub-penny stocks, bellow 1 penny per share and the Trip Zeros, priced between 0.0001 and 0.0009. These are a great deal for those who bought them first in large volumes. These are the most volatile types of penny stocks and therefore carry the highest risk.