You’ve probably seen or heard this story before: A penny stock soars X% in one day. Now, everyone wants into a trade that’s up significantly in just one day.
With penny stocks, these moves aren’t out of the ordinary, but you will want to look at some key factors if you hope to spot penny stocks before they have a big move.
Penny stocks defined
Penny stocks trade below $5 per share. Don’t be alarmed by the low price — even when it dips into actual pennies — because there are some legitimate penny stocks traded just like blue-chips on the NYSE and NASDAQ.
There are other penny stocks that trade on the pink sheets, or over the counter; these shares carry a higher degree of risk, because they don’t need to register with the Securities and Exchange Commission, nor are they held to the same financial and disclosure requirements.
Spotting the big move
When you’re looking for penny stocks with the potential for a big move, there are some key metrics to keep in mind. These include market cap and floating shares.
There are some penny stocks with a large market capitalization. Take Sirius XM Holdings Inc. (SIRI) for example; the stock traded below $5 per share at one point, but had a market cap of over $15 billion. That said, it would be hard for a stock as big as SIRI to have a meteoric rise; that’s why you should screen for stocks with a market cap between $50 million and $2 billion, which fit into the small- and micro-cap space.
Consider using finviz.com to filter for these types of stocks. Here’s a look at a snippet of the screener for micro-cap stocks currently trading under $5 a share.
The next thing to look for is a low float. Float is short for floating shares, the amount of shares available for trade on the open market. When the float is low — say below 20 million shares outstanding — the penny stock could experience a meteoric rise due to the interplay of supply and demand.
Next, look for some sort of catalyst. Positive company news can send a low-float micro-cap stock soaring. Thereafter, the stock could continue to build momentum. Any good news could ignite liftoff for a penny stock, but you only want to trade stocks with a real catalyst, rather than those that are up 50 percent in a day with no news or real developments.
These are only some key factors to look at when trying to spotting penny stocks poised for a big move. They’re not the be-all, end-all; consider technical patterns, fundamentals, as well as short interest in your hunt for penny stocks primed for a big move.
Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share.