https://www.thebalance.com/factors-driving-penny-stock-prices-4072794
Why try penny stocks? Are there benefits to trading penny stocks over more reputable and expensive companies? First, what is a penny stock, any stock that trades sub-penny up to $5. These are Typically small-cap companies, meaning companies with a cap under 2 billion. While a 2 billion dollar company might sound great, in terms of the market that is a minnow. These companies are some of the worst possible companies in the market. Most of these companies are doomed to long term but keep in mind 3 of 4 stocks follow the overall market, so know where you are within the market overall.
Why trade these if I just said they are the worst companies in the market, because that’s GREAT? That makes these stocks extremely volatile and Great to TRADE but a Horrible INVESTMENT. Meaning, that if you are a swing trader move on, if you are looking to buy 1,000 shares of a stock at $.05 for $50 and hold it until it goes to $100 and becomes the next apple, move on. You are going to get burned these stocks will go 0 before they go to $1. Although these stocks have a much lower barrier to entry due to low price and can have exponential price movement over mid and large-cap stocks. Berkshire Hathaway will take years before its 6 figure per share price tag moves 20% let alone 100%, although Penny Stocks daily move percentages in the hundreds and thousands of a percent a day. Think about it, after good news what is more likely for Berkshire Hathaway to go from $321k to $642k a share or an inflated penny stock to go from $.10 to $.30 after it has been promoted and pumped up.
As you see there are benefits due to low cost and volatility but if I say not to invest how do you trade these, SCALP. Look for big after-hours movers, as well as stocks pumped up on BS news and momentum trade. Levels can sometimes be hard to find with these stocks and execution especially short can sometimes be difficult due to thin liquidity. The safest way to trade is to momentum scalp the MEAT of The MOVE. DO NOT try and find that tops and bottoms as typically liquidity will be on the decline and you can get stuck in a position. When these stocks have a huge overnight run after being a declining penny stock for months or years odds are it’s on a BS promotion. Look for a breakout of highs or lows with large momentum backed by large volume. As soon as you see price hesitation of volume die, take your money and RUN!