In this article, we’re going to dive into the “new” world of penny stocks. I’ll explain what they are and why so many users on Reddit and other social media platforms are going crazy over them.
What Are Penny Stocks?
Penny stocks are shares of companies that trade for less than $5 per share. Some traders will make up their own definition, but generally speaking, this is what people mean when they say, “Hey, I bought penny stocks today.” It’s also the definition that the Securities and Exchange Commission has used.
Reddit Penny Stocks Are A Huge Focus
One of the biggest catalysts in the stock market over the last year was the influence of retail traders. While there’ve always been “mom and pop” traders trying their hand at day trading, the pandemic played a huge role in increasing the rate at which people entered the market.
The millennial generation had already begun investigating the stock market. But when the pandemic hit, many had either been without a job, furloughed, or put on limited hours. This created a unique scenario:
- Without income, people sought out ways of making money
- The options for work were limited thanks to stay-at-home orders and lockdown measures.
But you know what everyone can do from home as long as there’s an internet connection? They can trade, and that is exactly what we saw happen last year. Government stimulus also gave people some “seed money” to open their accounts. Coincidentally, the application of choice became Robinhood, and the source of information became social media.
As with many new traders, the goal is to make money quickly. But how do you leverage smaller sums of cash and make larger sums of money? You could go the route of options, but these are a bit more complicated to the novice investor. Things like time decay, expiration dates, strike prices, etc., all come into play when you talk about those types of derivatives.
Enter: The Wolf Of Wall Street (the movie)
The movie inspired a generation of young traders, instilling a sense of pride in buying stocks that others looked down upon. This ideology of “fighting back against the institution” was the core belief of several large subreddits, r/WallStreetBets included. Moderators gave a no BS attitude to trading. The sub has amassed millions of new, loyal followers over the last few months alone.
Growing support from “new money” investors like Mark Cuban, Chamath Palihapitiya, Dave Portnoy, and others added more fuel to the fire. Even government figures like Alexandria Ocasio-Cortez and Elizabeth Warren spoke publicly on the topic of “the little guy” standing up against Wall Street.
Retail traders say, “I’m Not Leavin’,” as the hoard of Redditors began forming alliances. Subreddits like r/WallStreetBets, r/PennyStocks, and r/Stocks, all built massive followings of loyal members looking to collaborate, and, in some cases, commiserate with eachother and the market was the centerpiece.
This mob mentality would ultimately stoke the fire that became the massive GameStop (NYSE: GME) short squeeze of 2021. The event would eventually spark interest in similar – or sympathy – trades like Express (NYSE: EXPR), BlackBerry Ltd. (NYSE: BB), and even Rocket Companies Inc. (NYSE: RKT). The new market niche of “meme stocks” actually sparked enough attention that a new ETF was created, VanEck Trust Social Sentiment ETF (NYSE: BUZZ).
Redditors Continue Watching Penny Stocks & Small Caps
Aside from the higher-price “meme stocks,” penny stocks seem to have become the primary flavor for Redditors. Aside from price, the smaller share structures for many of these lends a hand to increased volatility and the potential for massive breakouts. Throw in the community aspect of mobs of traders buying, and the 1-2 punch has become an equation for large market moves.
On any given day, of the most active stocks on the Nasdaq and NYSE, penny stocks are a good portion of the names on that list. Even today, during the morning session, we can see this as the trend. Of the top 10 most active NYSE & Nasdaq stocks, 7 of them began the day as penny stocks.
When you extend that to the top 100 most active stocks today, nearly 30% are penny stocks. Now, this doesn’t include OTC penny stocks, for instance, and that is an entirely different topic altogether.
While the most active listed stock right now, Sundial Growers (NASDAQ: SNDL), had traded roughly 90 million shares within the first hour of trade, the most active OTC penny stocks had already seen more than 150 million shares traded.
Granted, it is at a lower dollar amount. But considering that a company like Asia Broadband, Inc. (OTC: AABB), one of the popular penny stocks on Reddit, recorded more than 5,500 trades before the end of the first hour of trading on Thursday. With that in mind, you can’t ignore the action on the OTC either.
Are OTC Penny Stocks Risky?
Generally speaking, many of the OTC penny stocks on Reddit carry more risk than the main listed counterparts. If you’ve paid attention to some of the trends, you’ll see that sentiment and hype have become bigger drivers than fundamentals. Unfortunately, this hype has also lead to some very revealing issues that traders face: fraud.
Believe it or not, all users on social media platforms aren’t telling the whole truth, and this is something the Securities & Exchange Commission is cracking down on. Thanks to the GME short squeeze and other big market movers, the SEC has set out to rid the market of these bad actors.
On another note, the OTC market has fewer requirements necessary to list. In fact, some of the most active OTCs haven’t filed or submitted financial results in months, some not even in years. In light of this, current information is slim, which can pose an immediate risk to traders. How much debt is outstanding, what the company’s plans are, and if there is actually a plan at all, are things OTC traders won’t see in the case of defunct companies. That hasn’t stopped them from finding 3, 4, or 5 letters to buy for a quick flip.
Something that the OTC Markets Group has done to give further disclosure includes things like Stop Signs on companies late in the filings, Yield Signs for those that’ve posted limited information, and Skull & Crossbones for stocks that may be heavily manipulated in the market.
Reddit Penny Stocks In 2021
The story of starting small and making it big is ages old. But in 2020 and 2021, the exponential growth in retail traders has emphasized that anyone can make money in the stock market. With Reddit becoming a well-established resource, the community aspect of trading has grown in popularity and is likely to stay.
Now, public companies are even giving some recognition to these traders. In its last earnings update, GameStop management gave the nod to the merry band of Reddit traders. What’s more, people like Mark Cuban, an outspoken investor that came to fame during the dot com boom, even held an AMA on the platform for anyone to ask a question about investing. The crazy part is, this could be just the beginning of social trading as we know it.