hey what's going on everyone thanks for checking out this video my name is travis from master to
market and i wanted to make this quick video to talk a little bit about why i don't think penny
stocks make good long-term investments and this may come as a bit of a surprise because on this
channel i talk a lot about how i day trade penny stocks but it's important to keep in mind that
short-term trading such as day trading and even swing trading are much different from long-term
investing and in this video i'm going to go over five reasons why penny stocks are generally not
going to make good long-term investments and why you're going to probably have better luck
by looking into more reliable companies and more reliable stocks for your long-term investments
and the first of those five reasons is that penny stocks are going to most often be in long-term
downtrends and when you think about a trend in the market whether it be an uptrend or a downtrend
it's always going to be in your best interest to go with the trend rather than trying to fight the
trend and if a stock is in a downtrend you're going to be fighting that trend by trying to
buy into that stock and trying to predict the exact bottom of the move the same is true for
a stock that's in an uptrend if it's up trending the way that you would ride that momentum and take
advantage of that momentum is by buying into the stock and by trying to short sell it and
predict the exact top of the move in that case you would be fighting the trend of an uptrending stock
and really with penny stocks when you try to buy into the bottom of a move while the stock
is in a downtrend that's often referred to as trying to quote unquote catch a falling knife
odds are by doing this you're going to get cut and odds are by doing this you're probably going
to take a loss on the investment so if we take the example here with sndl we're looking at again the
long-term chart so we're looking at the daily chart in this example and you can see that it
is of course in a long-term downtrend making both lower lows and lower highs along the way
and i wanted to use this example because sndl actually recently had a pretty big spike up from
its low of 13 cents all the way up to a high of 60 cents per share just a few days later and it's
very common for these types of penny stocks to be in a long term downtrend but still every once in a
while have a big spike up in their stock so when that happens a lot of people get interested and
try to invest in these thinking that the bottom of the move is in and the stock is going to reverse
and start to actually trend upward but when this happens you have to actually ask yourself has
anything with the company itself actually changed or is this just a short-term temporary balance
in the stock price before it comes straight back down and continues with its downtrend
most of the time you're going to find the answer is just that the stock has had a temporary bounce
and there's nothing wrong with taking advantage of that temporary bounce by
day trading it or swing trading it but you can't look at it as a long-term investment
if the underlying company is still performing the same because the stock is most likely going to
continue performing the same as well okay and that's going to lead us to reason number two
which is that penny stocks are most often going to have poor financials
every penny stock on the market represents an underlying company and these penny stocks are
penny stocks for a reason most of the time the companies that they represent are going to be very
poor financially they're not very profitable companies they don't have strong revenues
they're not showing eps growth and odds are they're not going to be the next apple they're not
going to be the next amazon and they're probably not going to be a great long-term investment
a few things that you do want to look for when it comes to a good long-term investment
first is a current quarterly earnings per share or eps growth of at least 20 percent
following that you want to see also that there is an annual eps growth of at least 20 percent and
you want to see that there is ideally some high institutional ownership in the stock by doing your
research you're going to find that there is very few penny stocks that actually meet these three
criteria because again penny stocks are usually going to have much more poor financials and one
way that you can look for stocks that actually meet this criteria is by using so all you have
to do is go over to finbis and click on screen or up here at the top and because this is fundamental
data rather than technical data we're going to go ahead and click on fundamental and you can
see right here from the start we have a total of 7 622 stocks here in this screener and to narrow
this down we're going to first look for an eps growth quarter over quarter of at least 20 percent
followed by eps growth over the past year of at least 20 percent
followed lastly by institutional ownership of at least 30 you can see that right off the bat we
already narrowed the market down to a total of 380 stocks all meeting these three financial criteria
and what you're going to notice is that if you hover over the price of these stocks over here on
the right side you can see that very few of them are actually penny stocks and that's again because
most penny stocks are not going to have strong enough financials to meet this criteria which
again is one of the big reasons why penny stocks are not going to make great long-term investments
okay and that's going to lead to number three which is that penny stocks often have dilution
in its simplest form what dilution does is drives the stock price lower by creating a
huge amount of supply in the market at the end of the day the market is going to move solely based
on supply and demand if there's more demand than there is supply at a certain price that demand
is going to push the stock price higher and if there's more supply than there is demand
meaning that there's more sellers than there is buyers at a certain price that supply is going to
push the stock's price lower and dilution is very commonly seen in penny stocks which creates again
a large amount of supply and is going to most likely push the price of the stock down lower so
for that reason whether you're day trading swing trading or looking for a long-term investment
one thing that i always recommend doing is going on to a website like bamsec.com or even something
like scc.gov or otcmarkets.com somewhere where you can look for sec filings in a company and checking
to see if there's been any recent dilution in the stock so i'm going to go ahead and search for ttnp
uh this was an example of a stock also that recently had somewhat of a spike up
you can see that down here um it spiked from a low of about 11 cents per share all the way up
to about 25 cents per share within just a few days and then came straight back down which is
very commonly seen with penny stocks because they often fail to hold their gains when they spike up
and in this case the reason that it came straight back down and actually ended up going even lower
is because the day after this spike here under prospectuses and registrations on bmsec.com
you can see we have a 424b5 filing which tells us that the company is doing some kind of dilution
so in this case what this offering and what the solution is telling us is that there is 80 million
units each one consisting of one share of common stock as well as one warrant which is going to be
sold into the market for this stock so essentially it's creating 80 million extra shares of supply
which is going to of course take a huge amount of demand for the stock to actually break through
and continue pushing higher so what ends up happening is all that supply just drives the price
of the stock even lower and while this does happen every once in a while with large cap stocks it is
definitely much more common with penny stocks and is one of the big reasons why penny stocks
make such risky long-term investments okay so number four is going to be that penny stocks also
have less liquidity and less volume liquidity and volume is very important because every time
that you buy shares there has to be somebody on the other side of the trade to actually sell you
those shares and vice versa every time you sell shares there has to be somebody on the other side
to actually buy those shares from you so when you're trading or investing in these illiquid
penny stocks that on any given day may only trade a few thousand shares here and there
it can often be very difficult to actually find somebody on the other side when you're looking to
buy or looking to sell your shares in my opinion when i'm looking for either a day trade a swing
trade or even a long-term investment i like to see that there's at least an average volume of 100 000
shares every single day anything below that no matter how many shares you're trading even if
it's just a few hundred or a few thousand shares it can be difficult to find somebody on the other
side of the trade to buy your shares from you or to sell your shares too so going back to the fin
biz screener that we talked about just a minute ago uh you can also put in average volume criteria
as well to narrow the market down even further so because this is technical data we want to go ahead
to all and then down here on average volume we're going to go ahead and select over 100 000 shares
so now we know that every single stock in this list is going to not only have eps growth over
the past quarter and over the past year as well as institutional ownership of at least 30 percent but
they're also going to have enough volume for us to actually take position in knowing that they're not
to a liquid and we're not going to have any issues trying to buy or sell shares and really that is
going to go hand in hand with number five which is that penny stocks are much more easily manipulated
than larger price stocks one of the big ways that penny stocks are often manipulated
is with pump and dumps and what this ends up doing is causes inexperienced traders to buy into the
stock all the way up at the high right before the people that were promoting the stock start to sell
and drive the price of the stock back down so what happens is the people that pump the stock up end
up making a nice profit on the trade while the traders that were late to buy into the stock end
up taking a loss on the trade and we actually had a really good example of this just a few weeks ago
if we look at wei you can see that this was a stock that went from a low of about 73 cents
all the way up to about five dollars and fifty cents and actually in after hours on this day
it ended up getting up to over ten dollars per share and there was no news or anything to back
up this big spike up in the stock so because it was a pump and dump the price ended up getting
dumped straight back down and now it's all the way back to 1.46 cents per share but this just
goes to show that penny stocks again can be much more easily manipulated and generally speaking you
don't want to be heavily invested in something long-term if it can be so easily manipulated
okay so those five reasons are why i think penny stocks are much riskier long-term investments
and why i personally believe they should be only used for day trading or even swing trading
hopefully you found some value in this video and if you enjoyed please make sure to give it a like
and subscribe to the channel so you don't miss out on future uploads also if you want to learn about
day trading swing trading and other long term investing strategies all of that can be found at
my website master the market which is going to be the first link down below in the description but
anyway thank you for watching i hope you enjoyed and good luck with your trading and investing
you