Penny stocks are shares of publicly traded companies typically trading for less than $5 per share. These stocks are considered highly speculative and can be volatile. That tends to make them attractive to smaller investors, but it doesn’t come without risk.
The first thing to understand before deciding which penny stocks to buy is knowing what can be a source of momentum. Once you understand some of the origins of speculative trading trends, you can better formulate your trading strategy. So, what drives penny stock prices anyway? Here are seven things to consider heading into 2023:
#1: Market Demand & Supply
Like any other asset, the price of penny stocks is based on supply and demand. If there is high demand for a particular penny stock and a limited supply, the price tends to rise. On the other hand, if there is low demand compared to a higher supply (selling), the price tends to fall. Of course, this doesn’t include any other outside factors like some listed below.
#2: Company Performance
The performance of a company can also have an impact on the price of penny stocks. For example, if a company is performing well financially and has positive news, it can lead to positive market sentiment. That also means a potential increase in demand for its penny stock. On the other hand, if a company is performing poorly and has negative news, it can lead to a drop in demand and an increase in selling pressure. As we know from #1 on this list, the resulting market response leans toward lower share prices.
#3: Investor Sentiment
Investor sentiment can also play a role in the price of penny stocks. If investors are optimistic about a particular company (or the market as a whole), they may be more likely to buy. On the other hand, if investors are pessimistic, as they have been in the stock market during the 2022 crash, they may be more likely to sell.
Investor sentiment can also be influenced by social media and what retail traders are talking about on message boards and chat rooms. We saw this trend emerge more prominently during. the rise of meme stocks and the “Ape Movement” behind companies like AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME).
#4: Market Trends
Market trends can influence the price of penny stocks. If the overall stock market is performing well and there is a positive trend, this can lead to an increase in buying. Like investor sentiment, if the market is performing poorly and there is a negative trend, it can lead to a decrease in demand and more selling.
On this topic, there are micro trends to consider, and we call them sympathy trends. In some cases, a certain industry event or company headline sheds light not only on the company itself or the industry itself. It also puts a pointed focus on other companies with exposure to such an industry.
As far as company-driven sympathy sentiment, one example is when certain biotechs report significant updates. Headlines of positive FDA decisions on drugs place a focus on other companies either developing or commercializing drugs with a similar target.
#5: Regulatory Changes
Regulatory changes can influence prices for certain stocks. Things like changes in laws or policies can also impact certain industries. For example, if a company’s penny stock is subject to stricter regulations, this may decrease demand for the stock and lead to a drop in price. On the other hand, if regulatory changes make it easier for a company to do business, this may increase demand for its penny stock and lead to a rise in price.
One example is marijuana stocks. Constant regulatory changes, attempts at new legislation for legalization, and more spur varying sentiment in the stock market for pot stocks. The latest has been more bearish as Congress continues failing to pass any meaningful reform before the start of 2023. Will that still be the case by this time next year? We’ll revisit it in 12 months and find out.
#6: Insider Trading
Insider trading -IE buying and selling company stock by its directors, officers, or other insiders – can impact the price of penny stocks. If insiders are buying a large amount of shares, this may indicate that they have confidence in the company and its future prospects. While not always the case, it can lead to an increase in bullish sentiment. On the other hand, if insiders are selling a large amount of a penny stock, it may indicate a less optimistic outlook and can lead to a more bearish tone in the market.
Media attention can affect the price of penny stocks. If a company gains a lot of positive media coverage, it can lead to increase demand and a rise in price. On the other hand, if a company gets a negative light from media coverage, it can lead to decrease demand and prices dropping.
What Drives Penny Stocks Up Or Down?
Penny stock prices are influenced by a variety of factors. These include market demand and supply, company performance, investor sentiment, market trends, regulatory changes, insider trading, and media attention.
As a result, investing in penny stocks carries a high level of risk and should be approached with caution. It is important for investors to carefully research and evaluate the factors that may impact the price of penny stocks before making any investment decisions, and it’s never a bad idea to consult a licensed financial advisor if you have any investment questions.
Penny Stocks & Trading Strategies For 2023
You’ll also want to understand other nuances of trading penny stocks or higher-priced stocks in general. If you’re getting your feet wet, check out some of these articles below:
Top Penny Stocks Chart Patterns To Learn For 2023:
New To Trading Penny Stocks?
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