The 7 Types of Penny Stocks

There are 7 Types of Penny Stocks You Need to Know

Zombie Penny Stocks
Zombie Stocks on the Market. Lonely Planet Images

There are seven types of penny stocks, and understanding the differences will help you profit. You will have greater clarity of when to buy and sell and a much better understanding about the price drivers moving the shares.

See if you recognize these types of the penny stocks you own or may buy. Identifying which category the shares fall into may change your decisions and strategies for the investment.

Zombie:

There are thousands of penny stocks which are still trading on the exchanges, despite being lifeless, pretty much defunct, companies. When the business is so dead that there isn't even anyone who will bother to officially do the paperwork to delete their stock market listing, they may trade on for years as zombie investments.

Rubble and Ruin:

Most businesses go bankrupt or end up collapsing in one way or another. Sometimes this is due to competition, a shrinking market, a drunk CEO, a lawsuit, or just a misguided concept. Their share prices very often reflect the trainwreck which their best intentions could not help them avoid.

Hot Topic:

It may be 3D printing, Bitcoin, marijuana companies, or Dutch Tulip Bulbs - when everybody is stampeding into the same "hot" concept, investors dramatically overpay for shares.  Nothing stays hot forever (not even Occupy Wall Street, Gangnam Style, or The Spice Girls) and most investors get caught holding the hot potato.

Brand New/Tiny:

Plenty of great companies started in garages and basements. In fact, even if they have a proper office, they may still be new, small, or have only 3 employees. Companies like this will not be trading for $8 or $15 just yet, but a few of them eventually will, and my entire career is based on finding them early before anyone hears about them.

Undervalued:

Sometimes an industry is just out of favor with investors, or people are not seeing the company's underlying prospects and potential. There are often shares worth $4 that are trading at $2.50 and therein lies your opportunity.

Promotional:

You ever get a set of glossy, professionally printed materials in the postal mail, talking up some company? Or perhaps you saw similar information on your fax machine, or by e-mail.

Every wonder why they are telling you about it? No offense, but if the company had the prospects which were being touted, there is no need to send out a bunch of materials to thousands of people for free.

Promoters buy millions of shares of some almost dead penny stock which is trading for as little as ​a fraction of a single cent. Then they throw a lot of lipstick on the pig, convince plenty of naive investors to buy shares, the price goes up, and the promoter sells and walks away.

Watch Boiler Room (one of the best movies ever) or the Wolf of Wall Street to get a better idea of their game.

Just Visiting:

Given the high threshold price ($5) of what is officially a penny stock, there are many huge companies which may dip into this lower territory for a little while.

Many are massive corporations with plenty of prospects, and it will not be long until they climb out, to trade for $5.01 or more.

Here's your homework, for those of you who want to become extraordinary penny stock investors:

Find one example of a penny stock of each type mentioned above. Send your results to us and we'll tell you how you did!