The Year Of The Penny Stock

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Last week was one of the busiest weeks ever for trading volume, with 14.8 billion shares changing hands on U.S. exchanges. It ranked behind only three weeks in March 2020 and two in the darkest days of the 2008 financial crisis.

But rather than be propelled by volatile markets, the increase in trades has been driven by a different kind of phenomenon: retail traders going nuts over penny stocks.

Retail Traders On The Rise

On Monday, nearly one-fifth of trades on the entire stock market involved just six stocks priced at less than $1, according to Bloomberg. It was a milestone for retail day traders, whose Robinhood transactions have kept trade volume elevated for the last six months.

These penny stocks are often gambles. But in the first two weeks of 2021, they’ve been a winning bet.

  • Stocks priced at less than $2 have gone up 13%, and those less than $5 have gone up 10%.
  • There’s a downward return of value on pricier shares, with stocks trading at over $50 gaining about 3%.

The Elon Bump

Although penny stocks have largely been winners this year, one clearly rises above the rest — albeit by accident.

On Jan. 7, Elon Musk tweeted praise about the privately-held encrypted messaging app Signal. Traders responded by buying the wrong stock, Signal Advance, a small component manufacturer with one full-time employee.

On Monday, Signal Advance’s share price rocketed up 438%, to $70.85. It had closed at $0.60 the day before Musk’s tweet. (Shares had fallen to $5.86 by the start of trading Wednesday.)

The Takeaway: Nobody knows how long the penny stock boom will last. Analyst Joseph Saluzzi told Bloomberg, “I’ve been around for a long time, I’ve seen people in chat rooms and retail investors saying ‘we can make some money – it’s easy.’ There’s a risk it may not end well.”