Penny stocks can easily move in one direction with big percentage gains or losses.
When the demand is greater than supply, you may see 100% or even 1000% gain in one single day.
On the other hand, when the supply is greater than demand, you may see 100% or 1000% loss.
So what drives supply and demand?
Why does the demand go up so quickly?
There could be many factors and here are two of the main ones.
- Good News – The company may report good news such as earnings report or if the company signs a new contract with a big client. The company could announce share buyback or insider buying. These are great news that will drive up the price of the penny stock. When a company gets new patents or reversal merger, the stock price will definitely go up as these are all good news for the company.
- Stock Promoters – The penny stock price may go up tremendously if a company is pumping and dumping the stock. “pump-and-dump” is a term to describe an illegal trading strategies used by some big investors. A big investor or a group of investors have the ability to drive the price of a penny stock up or down because penny stocks are cheap and usually with low volumes. These investors first load shares of a penny stock and then promot the stock as a “hot stock” or “stock tip” to small players like you and me. After the small investors jump in, these big investors start to unload their shares, hence the penny stock will go back down. They make money by selling their shares to the small investors who loaded their shares base on their stock tips. This is called the pump and dump strategy. You must be really careful not fall into these traps.
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