5 DANGERS of Trading Penny Stocks

Just so you know.

I believe if you’re following a world renown and successful Penny Share expert, you’re in good hands.

They are able to spot low risk investments and guide you through the process of owning great Penny Stocks.

But as a trader, who only looks at charts – THIS IS DANGEROUS TERRITORY.

Remember, Penny Shares are high risk, high volatile, low credible companies that are LOW prices i.e. Under $1.00.

And so, I just want to write as a trader point of view five key reasons why penny stocks can be dangerous to traders.

DANGER #1: High Volatility (Jumpiness)

Penny stocks are notorious for their high volatility.

These stocks tend to experience rapid and drastic price fluctuations, often without apparent reasons.

I’m talking about companies that can jump 10%, 30% and even 70% in a day.

The lack of stability and price predictability can make it very difficult for traders to make informed decisions.

Sudden price jumps or drops can result in significant gains or losses within a short period, amplifying the risk factor.

And if you place your stop loss within a tight range, there’s a bigger chance you’ll get stopped out.

DANGER #2: Low Liquidity (Less Volume)

Think of Liquidity like the flow of water.

It tells you the ease of being able to BUY or SELL a market, without impacting too much of the price.

Once again, we look for low to medium volatility.

Penny stocks typically have low liquidity due to limited trading volume.

With fewer buyers and sellers in the market, it can be difficult to execute trades at the prices you want.

And this leads to slippage and even higher transaction costs.

Also, low liquidity may also prevent you from even entering or exiting your positions quickly.
And this can even TRAP you in an unfavourable market environment for an extended period of time.

DANGER #3: Not Established Businesses

Penny stocks are often associated with small, early-stage companies that are not yet established in their respective industries.

These companies may lack a proven track record, have limited financial history, and face various operational and market risks.

So if you want to invest in these type of companies as a trader, it’s better you do it with fundamentals, research, business models and future prospects.

If you do it purely on speculative purposes, this could be very risky for your portfolio.

DANGER #4: More Likely to Head to Zero

Yes all trading requires levels and degrees of risk and rewards.

But it is not worth it, if some petty company is doing really badly and is showing signs of going to 0.00.

Penny stocks are more susceptible to declining in value and potentially heading towards zero.

I mean, South Africa has witnessed instances where penny stocks have experienced substantial losses, which took out a ton of investors.

For example, companies like African Bank Investments Ltd (ABIL) and Oakbay Resources and Energy Limited serve as cautionary tales, where investors lost huge amounts as these companies approached or reached bankruptcy.

Talking about bankruptcy.

DANGER #5: High Chance of Bankruptcy and Liquidations

Penny stocks are also more likely to go bankrupt or get liquidated compared to a Blue-chip stock.

This is because of the nature of the companies, the inexperience, the lack of funds and structure, as well as its credibility.

Financial instability, mismanagement, or unfavourable market conditions can lead to the collapse of these businesses.

We saw this also in South Africa with the liquidation of Sharemax Investments and the bankruptcy of Pamodzi Gold Limited.

This lead investors with little to no value for their investments.

So remember this as a traders

We want low volatility, high liquidity (volume), credible companies with great reputations, track record and credibility. And we want attractive charts that work with our trading strategies.

If you want to be a savvy Penny Share investor that's fine.

But as a trader, I have given my precautions.