When it comes to stocks, virtually anything can be bought and sold. Even in one day. But that’s a far cry from the term day trading, which implies the strategic purchase of stock with the intention of selling it on same day, and at a profit.
But when it comes day trading penny stocks, the game changes entirely.
Penny stocks are not attractive candidates for day traders, and for several reasons.
The Challenge of Liquidity
First, there can be liquidity issues with penny stocks.
There is no guarantee that buyers are waiting to snatch up your offering at your askingprice, and this thin volume can last for days. Even then, when a bid arrives, it may be well below the level of the last trade, much less your asking price, and in a likelihood that last trade could have been your purchase.
Day traders in listed stocks are protected by an assurance of bids and offers and a more predictable shift in prices. With penny stocks, nothing it a sure thing.
The Challenge of Volatility
Also, penny stock prices rarely move significantly, either in terms of absolute value or momentum. Certainly not enough to entice a day trader seeking upside to the game.
For example, a 10 cent stock needs to move several cents before an investor even makes back their cost of doing business (commissions). In terms of percentage of appreciation, this may be too much to ask for in a given day.
The paradox comes when you consider the size of the trade required to make any meaningful money as a day trader. You’d have to trade a massive amount of stock, up to 10,000 shares or more, to make even a hundred dollars on as little as a one cent price increase.
That would require a trade of 10,000 shares, often well beyond the scope of a penny stock’s daily trading volume. You can cut that in half with a two cent price increase, but that amounts to 20 percent appreciation in a given day.
The Better Bet
Day traders would be well advised to stick to listed stocks with reliable volume on either side of the trade. Day trading is risky enough without the risk of not having a buyer on the horizon. And even if there is one, the amount of stock on the block – your stock – is likely to be beyond reach of other investors.
