“Buy low and sell high” has long been a popular mantra in the trading world. While this strategy seems like common sense, it is sometimes easier said than done, as newer traders struggle to time the market and to part with favorite securities. However, more and more investors are starting really, really low in 2020, trading in stocks with very low share prices, sometimes termed “penny stocks,” or securities that trade for less than $5 for per share.
Commission-free apps and sites have made trading inexpensive stocks more accessible and appealing than ever. According to New York Stock Exchange data, more than one-quarter of the shares traded in the U.S. market have been at $5 or less for several months already this year. The pioneer of zero-commission trading, Robinhood had more than half of its accounts with sub-$5 stocks this summer and more than 10 percent of its most popular stocks as of September 2020 were trading at less than $5.
Investing in newer companies with a smaller market capitalization (read: not much of a track record in their industry) can be exciting – and it can also be volatile. On one hand, your initial outlay does not need to break the bank and you may enjoy notable gains in just a few hours. On the other, some of these stocks are a bargain for a reason: These unproven companies have a long road to success and they are likely to see a lot of speed bumps along the way. In fact, many financial advisors and asset managers tend to avoid lower-priced stocks, which is why individual investors have been leading the charge this year.
Why smaller stocks are such a big deal in 2020
Even as the Federal Reserve’s U.S. Coin Task Force is considering retiring the penny altogether due to pandemic-related shortages, penny stocks are moving in the opposite direction this year.
For starters, these affordable securities appeal to newer investors who may not have large stores of capital to draw from or who are simply getting their feet wet in the market for the first time. The risk-reward equation is also easier to manage when initial investments are on the smaller side: A blue-chip stock is likely a lot more intimidating to purchase than a $5 investment in a small business.
Likewise, as the number of day traders continues to grow as people spend more hours of the day at home, more are turning to inexpensive investments, typically the purview of day traders.
A few minutes of research shows that several more affordable stocks have enjoyed wild rides this year, growing in the triple digits (and some have come back down to earth as well). While many new companies will struggle, a few will distinguish themselves from the pack and validate investors’ interest. As individual investors comprise a larger share of the market and more inexpensive stocks see some wins, smaller stocks may continue to see more activity.
While some of the movement in this area was due to pandemic-driven selloffs earlier this year, which even plummeted some big stocks to sub-$5, small companies and stocks are continuing to be big business this year.
Who should trade in inexpensive stocks
The answer is: anyone who is interested. But with a few very important caveats, most notably the ability to withstand the loss of your entire investment.
Don’t do it based on fear of missing out on trendy trading or fear of being left behind – there is a lot of uncertainty in this market, and low-priced stocks are often the beneficiaries of inscrutable “stock promotions.”. Rather, dabble in less expensive stocks because you’ve done some research and have the time to monitor the ups and downs of your portfolio. Know that most of these companies are small and unproven, which leads to risk, so make sure you have a plan, and then follow it. Pay attention to small fluctuations in price and act when the time is right.
If you need assistance with research, you will find a wealth of sites that offer insights on stocks of all shapes and sizes. For instance, Investors Prism’s PRISM stock indexes track small- and micro-cap companies across a spectrum of innovative industries, including life sciences, medical devices, diagnostics, genomics, biotech and the digital economy.
If you are curious but newer to this option, try out a few commission-free trades of smaller stocks and see where it takes you. You might make/lose pennies and you also might find an exciting trading path that offers lasting interest and value.