PENNIEStoSTACKS

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STOCK TRADING PENNY STOCK TRADING
Who Actually Trades or Invests in Penny Stocks?
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BY ELVIS PICARDO Updated Jun 25, 2019
The Securities and Exchange Commission (SEC) defines a "penny stock" as a security issued by a small company that trades at less than $5 per share. These are stocks generally quoted over-the-counter, for instance on the OTC Bulletin Board or OTC Link (formerly known as the "pink sheets").


Yet, penny stocks are highly speculative, and the odds of losing your entire investment in a penny stock are far greater than is hitting a home run and raking in huge profits. Still, millions of people still trade penny stocks on a daily basis. Here are 10 types of penny stock investors, whether they're found on the long side, short side or both.

[ Need to learn more about trading penny stocks before you decide which kind of penny stock investor you are? Check out Investopedia Academy's Penny Stocks Trading course to get a complete understanding of the penny stock world and see examples of how to effectively trade them. Learn more here. ]

Experienced penny stock traders: Many who thrive in the frenetic world of trading do so by carving out a niche in a specific sector or asset. Penny stocks are one such niche, although the number of traders who trade these stocks is a fraction of those who trade established securities and blue-chip stocks. Experienced penny stock traders aren't deterred by the sector's limited liquidity, its wide bid-ask spreads and its frequent market pricing manipulation. For these players, there's little left to surprise them, even in such a volatile market as penny stocks. They can be day traders or swing traders and they'll take both long and short positions. (See also: Pros & Cons of Day Trading Vs. Swing Trading.)
Corporate insiders: When corporate insiders such as top management buy shares of their company's stock, it's usually taken as a sign of confidence in the company's prospects. Conversely, when these insiders dump shares, it's often an indication that the company is deteriorating and that its stock price may collapse. This rule of thumb doesn't quite apply to penny stocks, however, as insider activity usually goes in one direction: the amount of selling generally dwarfs buying rates (in part because the company may be approaching bankruptcy). These insiders often help orchestrate manipulations in the penny stock market, having traders artificially drive up volume in a specific stock or group of stocks via such actions as "pump and dump" schemes. (See also: How Does a Pump and Dump Scam Work?)

Hedge funds: While many financial institutions are prohibited from trading penny stocks, loosely regulated hedge funds have no such restrictions. That said, most hedge funds won't trade penny stocks on the long side: They far prefer short-selling penny stocks that look to have peaked after being heavily promoted. Penny stocks, although they often do indeed trade for mere pennies, can still be exceedingly dangerous to short because of the risk of a short squeeze. So while the risk-reward payoff for shorting a penny stock is too skewed (i.e., offering a limited reward if the short strategy works and unlimited risk if it doesn't) to be worthwhile for an average investor, the strategy may entice a deep-pocketed hedge fund.
Short sellers: Astute traders know there's more to be made by short-selling penny stocks than by buying and holding them. Unlike hedge funds, however, these traders may lack the capital needed to withstand the occasional short squeeze. So they have to rely on networking and leveraging their experience and market intelligence to identify suitable short targets whose shares will decline precipitously from current levels. These short-selling traders are unlikely to be "contrarian" and short-sell a stock that's rising due to heavy promotional activity. Rather, they may pile on the short positions once the stock begins sinking, hoping to hasten its demise.

https://www.investopedia.com/articles/active-trading/083115/who-actually-trades-or-invests-penny-stocks.asp