Have you ever seen this happen in the penny stock market before? Here is why and how penny stocks can shoot up over 100% in a day, and how you can profit from this!
Overnight Xenetic Biosciences, a penny stock, shot up from $2 to $4.75! That represents a huge 237% overnight increase.
How and why do these penny stocks routinely shoot up 100% or above overnight? Why can’t normal stocks such as AAPL, MSFT, or even the SPY do this?
Well it’s a combination of the stock’s float, the average volume, along with the price. Let me break it down so you can better predict these movements.
Let’s jump right in.
The penny stock’s float
The float of a stock is the amount of shares that are available for the public to buy or sell. If the stock only has 100,000 shares available for the public to trade then any jump in volume will cause the stock to explode in volatility.
For example, Let’s continue to look at XBIO.
As we can see the float for XBIO is only 8 million shares. A normal stock has a float in the size range of 250 million or above. The higher the float the more ‘stable’ the stock’s intraday price is.
Penny stocks are purposely created to be volatile and with low float. This is because if there are less shares available to trade there is a higher chance the stock will explode in the future on any news, hype, or rumor.
When looking at penny stocks, always check the float. It will help you understand just how fast this stock can move. In order to get a proper idea we need to also look at the next statistic…average volume.
Simply put, a penny stock’s float will directly determine how likely it is to explode in price. Some penny stocks have a very small float in the 30-50 million shares range. If you see this then chances are that stock has a strong likelihood of exploding in the future.
The penny stock’s average volume
As we can see the average volume for the past 10 days is a huge 50 million. This means that the public float of the stock traded hands six times!
So why does this matter? It’s because of the law of supply and demand. If there are more buyers then there is a supply of the stock then the price will continue to rise as more and more investors are willing to pay a higher premium to get in.
This will very fast lead to more and more investors FOMOing into the stock; FOMO stands for Fear of Missing Out. This FOMO will cause people who think they will make a quick buck to buy at market price, which further pushes up the price.
All of this is only possible with the following statistic however.
The penny stock’s share price
Without a low share price retail investors can’t FOMO in.
This is because it’s harder to buy 10,000 shares of a stock worth $10 than it is to buy 10,000 shares of a stock worth $1. Most people who trade penny stocks only have a little bit of capital to throw into the stock. Something like $500 or $1,000.
If the penny stock’s price was $10 then it would be harder for the penny stock to move. This is because the float and average volume of shares are static, meaning they won’t change.
As a penny stock is pumped up closer to $10 it will begin to lose steam. This is because retail investors won’t put their entire life savings into a penny stock and slowly as the penny’s price rises more and more retail investors will leave.
This is why the share price of the penny stock is so important. When looked at in tandem with the other two variables we begin to see that in order for a penny stock trader to be successful then need to understand what variables enable these stocks to move as fast as they do.
How you can use this information to benefit you.
Let’s look again at XBIO.
So you target a penny stock. In this case it is XBIO.
You wonder if the stock has the capability to move in an explosive direction upwards. The first step you should take is to look at the stocks statistics.
I tend to use Yahoo Finance, it always has been accurate and on point. Further its easy to use.
Type in the stock ticker on the top of the page.
Once you press enter the stock should come up. For this example type in the ticker XBIO and click enter.
In the next screen navigate to the statistics panel and click on it.
You should be greeted with the statistics of XBIO. Scroll down, here is where you can find the float, average volume, and price of the stock.
By understanding how to do this you can successfully screen out possible investments.
This is the secret to finding the explosive penny stocks and why they can move up in price so fast and go so far.
By understanding the anatomy of penny stocks you will gain the ability to position yourself to profit from 100% or higher moves in the penny stock market.
Always remember to look for the three most important variables before investing; the float, average volume, and price. If all three of these variables are good then they are in the green to make money!
If you want to learn more tricks of the trade you should check out our other posts.
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Until we meet again!