Penny Stocks - After Corona
Penny Stocks – After Corona

Best Penny Stocks Of 2021

Find out Everything you want to know about Penny stocks, what they are, where to buy them, how to invest, top Penny stocks of 2021, and so on. 

What Are Penny Stocks

As the name suggests, Penny stocks are those stocks that trade at a per-share value of $5 or less. This definition has been established by the Securities Exchange Commission (SEC). SEC is an autonomous body regulating the financial markets and security trading in the US. 

Earlier, the stocks that traded at $1 were categorized under Penny Stocks, however, in 1934, SEC released the ruling of changing the value to $5. 

At times, this definition might not strictly apply. For example, during the financial crisis of 2008, some of the top company stock prices fell to $1 or below $5, these were not Penny Stocks. Penny Stocks are stocks of smaller companies.

Further, at times, SEC also categorizes those stocks which don’t have an active market for trading under the Penny Stocks Category. So you may encounter a few deviations from the definitions at times. 

Where To Buy Penny Stocks

Penny Stocks trade on a Stock exchange such as the NYSE as well as in the over the counter or the OTC market.  Some of the places where you can look for the Penny on the OTC bulletins as well. 

Two such platforms recognized by the SEC on its website are OTC Bulletin Board A FINRA Facility and the OTC Link LLC owned by OTC Markets Group, Inc. However, there can be other portals as well for OTC trading of Penny Stocks

Penny Stocks also trade on the Foreign Security Exchange. So that is another place to buy them, however, you must abide by the foreign transaction regulations of the SEC. For a deeper understanding, check out their website or consult a broker.

However, you can’t buy Penny stock through just any broker. The broker needs to be registered with the SEC under section 15(h) of the SEC Act, 1934. This has four conditions that need to be complied with to become a registered broker and it also includes required disclosure details related to customer’s transactions. 

SEC has also published a Microcap Investing Guide so that investors are aware of the rules of such investing. Ensure reading the same here.

How Are Penny Stocks Different From Other Stocks?

One key difference is clear because of the definition of the Penny stock, that the per stock price can’t be greater than $5. Apart from this, there are a few other differences that you as an investor should know about. These are as follows:

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1. Lack of liquidity: 

Penny stocks are not very frequently traded, even if they are traded on the stock exchange. This leads to a lack of liquidity. What that means is that the investors might find it very hard to sell the stock they own without compromising on the price. This might even lead to a loss of a huge proportion of money invested in the stock or an overall loss altogether.

2. Lack of Publicly Available Information: 

As it is known that not all Penny stocks or Micro Stock trade on the stock exchange, and most of them trade on the OTC market, not all information is available publicly. This information can be relevant for trading in these stocks as it can affect the price of these stocks. Such information might be missing or might be outdated. Therefore, investors need to be careful while investing in Penny Stocks. 

Further, SEC doesn’t have similar disclosure requirements for all kinds of companies. Smaller companies have lesser disclosure requirements. Therefore, their financial statements might not portray the economic reality of the business.

3. Prices are Not Frequently Updated:

Because the Penny stocks don’t trade so frequently, the price doesn’t reflect recent developments in the industry. This might lead to investors getting misled by the trading price which might be far away from the intrinsic value of these stocks.

4. Higher Risk

Most OTC portals don’t have any minimum asset requirement to list security. Therefore, the company might not have enough assets to pay off the equity shareholders. This increases the risk of investment.

Further, these companies are most of the time newly formed without substantial performance records. Therefore, there is a lack of predictability in such investment.

Why Invest In Penny Stocks

You must be wondering, that if Penny Stocks have so many flaws, then why do people invest in them? Let’s find out why:

1. Lower Investment Requirement: 

As we know that Penny Stocks have a per-share value of $5 or less, anyone with a lower amount of funds available can start trading by investing in Penny stocks. This is a lucrative opportunity for beginners and several smaller investors who only have a few pennies to spare. 

Not all investment is fruitful, but not all investment is unfruitful also. The risk of loss of investment no matter how high in percentage terms, is only small in absolute Dollar terms. Therefore, Penny stocks do attract a lot of small or retail investors, students, and similar people.

2. Greater Return Expectations: 

At times, the motivation behind Penny Stock investment is not the investment constraint but the speculation or expectation of this stock becoming a multi-bagger. Stocks of those companies which grow over time gain a huge amount in market cap. 

Investors speculate about identifying these stocks in their seed stage and then gaining very high returns when these companies grow into big multi-national corporations. Such stocks give a very high return. However, finding such stocks is not an easy task.

How To Find Penny Stocks

Finding a good Penny stock involves a few steps as shown in the below flow diagram:

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1. Analyzing Risk Taking Capacity

As we know, penny stocks are a risky affair. It might not be right for every investor. Those who might require liquidity in the near future might not want to block a lot of their capital in illiquid penny stocks. 

Therefore, analyze your risk objective, liquidity constraints, and other such factors before deciding to invest in Penny Stocks.

2. Developing a Market Understanding and View

Well, isn’t this always the case with investing? Smaller companies are impacted more severely than bigger companies by macroeconomic events such as geopolitical risks. Therefore, investors need to have a good understanding of how these events impact the markets and then adjust the same for the Penny Stock situation.

3. Research the Stocks

Generally, for midcap and large-cap stock, a bottom-up approach is followed, where you select security first and do the research around it. However, for Penny Stocks, you follow a top-down approach by choosing the industry and sector first, researching around it, and then picking out stocks.

4. Practice Trading

This is also known as paper trading. Here you keep a track of the movement of the selected Penny Stocks for some time and then decide whether they meet your expectations or not.

5. Develop Insights into Valuation & Price

Generally, people use these terms interchangeably, however, that is not the case. Valuation is an analysis of how much the stock is worth, while the price is the current purchase price. This step is required to spot under and overvaluation. If you can rightly calculate this difference then you can execute the ‘Buy-low, Sell-high’ strategy well.

6. Incorporate Dilution into Your Analysis

As we know that these companies are small, these might be constantly growing. This leads to a possibility that they will issue new shares to raise more capital. If that is the case, then percentage ownership and in turn the share in profit can drop i.e. get diluted.

7. Don’t Speculate

A low price might not always be good, there might be a good economic reason behind such a low price. Don’t go by the low price is always a good approach, do your research.

8. Don’t Get Duped

Everything takes its due course of time. Don’t get moved by stories of overnight success. Be sure that the money you put in Penny Stocks will be blocked for a certain period and if that is not suitable to you, then don’t invest.

9. Formulate an Investment Horizon

Well, this is always important. If you have a short investment horizon, don’t invest in Penny stocks. Remember they are seeds that might grow into trees over time and not overnight. Defining the investment horizon will narrow down your investable option.

10. Review & Rebalance Periodically

This is important in every investment but more so in Penny Stocks investment because these are illiquid. If you need to rebalance your investment, then you need to find a buyer, which is not always easy. Therefore keep constant track of your investments.

Top Penny Stocks In 2021

Now coming to the most important part of the research on Penny Stocks. Which Stocks to look out for in 2021 and why. The below table is a compilation of our top picks of best Penny Stocks to buy:

Stock Symbol Industry
Avino Silver & Gold Mines Ltd.  ASM Precious Metal
First Majestic Silver Corp.  AG Precious Metals
Polar Power, Inc.  POLA Energy
Freedom Leaf, Inc. FRLF Marijuana
Canopy Growth, Corp. CGC Medicinal Cannabis
Electra Meccanica Vehicles SOLO Electric Vehicles
Catalyst Pharmaceuticals Inc. CPRX Pharmaceuticals
Aphria Inc. APHA Medicinal Cannabis
  • The precious metals sector is a safe haven and due to recessionary headwinds and the COVID-19 pandemic, people have become more bearish in their approach. Although this sector witnessed a fall, it is expected to rise in the near future. So if these stocks are low priced right now, they are a good buy

 

  • Polar power and Electra Meccanica Vehicles are gaining momentum due to increasing demand for renewable energy and shift to non-petro fuel

 

  • Medicinal Cannabis & Marijuana stocks are gaining pace due to increased news about legalizing these in various states. It is expected that these will witness a huge rise

 

  • Pharmaceuticals and related sectors are gaining momentum because of the current pandemic situation. Those which are successful in these stressful times will see a great rise in the future.

 

  • CPRX and APHA are top picks on Robinhood

 

Conclusion

With this, we close our analysis on penny stocks, hope you found this analysis to be interesting. Keep researching the market, keep investing, and keep profiting.