It's difficult to say precisely how much penny stocks can fluctuate in a day. Penny stocks are highly volatile due to their speculative nature and low capitalization, volume and valuation. Penny stocks can fluctuate substantially within minutes, causing a frenzy among investors looking to make big money, so traders need to be wise.
The Promise of Riches
Penny stocks are spoken of as vehicles that can generate riches in small periods of time. The hysteria typically touts 1,000 percent gains within a day, an hour or a minute. However, penny stocks are known to have generated significant wealth for investors, particularly day traders. Inexperienced investors may underestimate the volatile nature of penny stocks, hoping that the volatility moves the stock upward, while forgetting the downward risk potential.
Penny stocks are viewed by much of the investment community as too speculative to be considered worthwhile investments. Reasons for this perception zero in on excessive fluctuation caused primarily by a lack of information available on the company, a lack of oversight from the exchange and relatively small trading volume that gives each trade more influence. These factors combine to make investors jittery and looking for the quick buck. The Securities and Exchange Commission says penny stocks are one of the riskiest investments available.
Low Valuations and Volumes
Penny stocks, by their very nature, have significant potential. A stock with a low valuation of pennies, or dollars, does not have to increase much to generate a substantial percentage increase. A stock valued at 2 cents per share that increases by 1 cent generates a 50 percent profit. Day traders take advantage of high volatility to generate significant gains with penny stocks, increasing the volatility more. Casual investors need to be careful with potential penny stock slides due to market speculation, day traders and volatility risk, as they could get stuck with worthless stock that other investors have sold after the hype ends and the price falls back down to earth.
Penny stock investors who do not understand the day trading of volatile penny stocks can get left in the dust by other savvy investors. Cautious investors consider penny stock investing tantamount to gambling because of volatility spikes and avoid it altogether. A side market also has developed, with scammers seeking to drive up the price of penny stocks artificially, due to their inherent volatility issues. Investors who know the penny stock market dynamics can profit with wise decisions and by avoiding the scams.
- SEC: Penny Stock Rules
- CNNMoney: Trader Turns $1,500 to $1 million in 3 Years
- MarketWatch: 10 Ways to Trade Penny Stocks
- U.S. Securities and Exchange Commission. "Penny Stock Rules." Accessed Aug. 4, 2020.
- U.S. Securities and Exchange Commission. "Microcap Stock: A Guide for Investors." Accessed Aug. 4, 2020.
- Federal Bureau of Investigation. "Penny Stock Fraud Nets Millions." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-9 Sales practice requirements for certain low-priced securities." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-2 Penny stock disclosure document relating to the penny stock market." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-3 Broker or dealer disclosure of quotations and other information relating to the penny stock market." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-4 Disclosure of compensation to brokers or dealers." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-6 Account statements for penny stock customers." Accessed Aug. 4, 2020.
Brian Stankich began working in banking and insurance after obtaining a Bachelor of Science in economics from Purdue University. He later directed an international NGO in southern Europe and has certifications in skills and development training and coaching.