What are junk stocks and is it worth investing in a penny stock


Junk shares are those that are characterized by low quotations on the stock exchange and insufficient liquidity. Investing in these securities carries high risks, but they can also result in large profits, significantly exceeding the average yield for blue chips.
What are junk stocks and is it worth investing in a penny stock

What are junk stocks – penny-stock

Penny stocks may include stocks that are not listed on the stock exchange. However, in the US, traders consider securities worth up to $ 5 as such, and up to € 1 in Europe. Sometimes in the junk category, shares of highly liquid corporations fall in value temporarily and have received the status of penny stock. This also includes shares of companies with low capitalization, the price of which traditionally does not exceed $ 5.
What are junk stocks and is it worth investing in a penny stockDespite the fact that the opinions of investors differ as to which securities should be classified as junk, there are a number of common signs:

  • issuers do not comply with the listing standards of stock exchanges , as a result of which they conduct IPOs on over-the-counter platforms;
  • shares can be bought from the issuer without involving a broker or using over-the-counter boards;
  • a large spread between the bid and ask prices, as well as high volatility in intraday trading , amounting to about 300%, which makes the security a speculative instrument;
  • high broker standards for collateral during the registration period of short positions when making sell transactions;
  • predominantly for junk shares, exceptionally long buy transactions are allowed , which allows you to make a profit only with a significant increase in their value;
  • large participants are not interested in these instruments , so small investors can handle large volumes;
  • low level of liquidity – it is easy to manipulate assets, since an insignificant number of transactions are made on them, and this creates fertile ground for fraudulent actions.

Based on these features, investors can choose high-yield assets with a high level of risk.
What are junk stocks and is it worth investing in a penny stock

Types of garbage shares

The analysis of the instrument is significantly hampered by the fact that securities are placed outside the exchange. Nobody obliges the issuer to conduct an independent audit and publish financial statements in an extended form. Junk stock quotes do not appear in public streaming tables. To analyze securities, you need to determine which of the three groups they belong to:
Rising stars . Little-known firms with no operating history or financial reporting. They do not have a large capitalization to get a sufficient rating from Moody’s. These shares are considered junk shares, no matter what their current value is.
Fallen angels… Firms with a sharp decline in financial ratings, which was due to a deterioration in financial position or poor management on the part of managers. Such securities are characterized by a high probability of high value recovery.
High-debt – companies on the verge of bankruptcy or being taken over by large corporations. Their stocks are considered the most risky to invest in.
Capital-intensive – companies with a stable financial position, but wishing to attract additional investments that cannot be secured with bank loans or their own funds. Such securities are growing rapidly in value and receive a high credit rating.

Analysis of penny stack securities

Shares belonging to these categories are characterized by low activity on exchanges and are often used for manipulations, which makes classic trading with graphical and technical analysis impossible. Here fundamental analysis is used, which consists in studying the following data:

  • news published by the company;
  • industry news;
  • financial report;
  • information provided by insiders;
  • macroeconomic indicators.

Experts recommend paying attention to junk stocks with dynamics characterized by the presence of correlation with key stock indices for at least 6 months. When investing in these instruments, you need to analyze the changes regarding blue chips, as they provoke volatility in the sector of junk securities related to the same sector of the economy.
What are junk stocks and is it worth investing in a penny stockPyramid, which can be guided by when choosing garbage stocks for investment [/ caption] Stocks that can potentially bring high profits, as a rule, are characterized by rather dynamic growth in comparison with options and futures, which is especially important in relation to enterprises in the energy and manufacturing sectors. Trading in cheap stocks is characterized by excitement on the part of investors. This is expressed in a quick sale of an asset when it reaches its historical peak values. A one-day reversal, which is customary for technical analysis, is forming. To minimize risks, you need to diversify your portfolio as much as possible by purchasing securities from as many issuers as possible.

It is not recommended to invest more than 5% of the total portfolio in one instrument.

What you need to know about garbage shares: https://youtu.be/czGgGYkC5EI

Manipulation schemes

Stock manipulation is carried out according to several schemes, the most popular of which is pump and dump. Investors artificially provoke the growth of quotations, and then they sharply bring them down. Low liquidity securities are manipulated according to a standard scheme. It consists in disseminating information, under the guise of insider information, about the upcoming large purchase of shares. The goal is to provoke insufficiently informed and inexperienced market participants at the mercy. To achieve this goal, the following means can be used:

  • false press releases, analytics;
  • sending messages under the guise of spam;
  • throwing in a controlling stake to keep the buzz among investors;
  • dissemination of insider information.

What are junk stocks and is it worth investing in a penny stockPump and dump [/ caption] To properly invest in this type of asset, you should study the market in detail and familiarize yourself with manipulation schemes. It should be borne in mind that in addition to high profitability, these instruments are characterized by certain risks.

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