How Penny Stocks Are Affected by Trends - dummies

How Penny Stocks Are Affected by Trends

By Peter Leeds

The penny stock market is filled with trends, which are swirling all around you right now. These trends come in all shapes and sizes — you can find trends in social choices, consumer behaviors, and even within industry groups and sectors. For example, consumers stop eating at restaurants that use Styrofoam for takeout, or they begin taking staycations rather than vacations.

Trends also come with different speeds. Long-term trends take years to play out, while fads and short-term trends can come instantly and sometimes go within days. Consider the difference between a slow trend, like the declining popularity of smoking, and a fast trend, such as the September 11, 2001, terrorist attacks, which changed the focus and priorities of most of the world nearly instantly.

Whatever form they take, these trends affect how your penny stocks perform, serve as a warning to stay away from certain types of investments, and tip you off to which shares you should be loading up on. You can benefit by anticipating these trends and reacting accordingly.

Sector and industry trends for penny stocks

When an entire industry or sector is affected by a trend, it will create both profit opportunities and risk. Some famous trends that have changed sectors and industries involved the development and growth of the Internet, and the move toward greater security measures after the attacks on the World Trade Center and Pentagon on September 11, 2001.

A trend of rising oil prices will affect penny stocks in the oil production industry. Oil companies will be pumping and selling a more valuable commodity, so their share price should benefit. This trend would also affect other energy sources, such as those in the renewable energy, nuclear, and coal industries, because these industries may become proportionally less costly in comparison and so see demand rise.

Stay in tune with trends affecting various industry groups by keeping the following considerations in mind:

  • Be on the lookout. By simply paying attention to trends in the first place, you will find that you start to notice them. The more you notice, the more you will begin to understand how they may affect the penny stocks you’re watching.

  • Follow the media. The news media both creates and follows trends. By paying attention to what trends the media is focused on, you have a pretty good handle on what’s trending in society. For example, as media coverage of the Occupy Wall Street dropped off rapidly, you would have been able to surmise that the popularity of the movement would diminish.

  • Read industry and trade publications. By reading newspapers, magazines, and blogs that are specific to certain types of industries, you will be able to pick up on trends that may affect certain penny stocks. Importantly, because these are niche publications and not as widely followed, you will have a trading advantage over traders who only look to the mass market for their information.

  • Ask the companies you’re following. The penny stocks you’re following already know what trends are likely to impact their operations. Call the company and ask them straight up.

If you anticipate a sector or industry trend and position yourself accordingly with your penny stock investments, you stand to benefit a lot more than traders who didn’t see it coming.

Trends in the overall market for penny stocks

Most trends that affect the stock market occur due to the herd mentality of investors. Certain types of shares can be affected all at once, or certain price ranges of stocks, or even groups of investments based on the nation they are from, or the product they sell, or the age of the management team.

For example, investors may decide that companies based in China are the next hot thing, and shares of every penny stock from Beijing almost instantly doubles in price. If rumors start spreading about a few gold production companies falsifying their exploration results, you may see a sell-off across all the shares in that industry.

During the dot-com bubble, days before it popped, investors were throwing money at the stock market and driving the prices of shares higher. This trend then reversed sharply, shares collapsed across the board, and it seemed like no one wanted anything to do with investing anymore.

Trends in consumer and social behavior for penny stocks

Sales of products and services are the result of choices made by consumers. When you decide to eat at Burger King or get a new iPod and buy it at Wal-Mart, those are choices. Companies then react to the similar actions of you and millions of other people by changing prices, or producing more, or expanding/contracting their market.

These adjustments by the companies are called marketdriven adjustments, because they are facilitated or curtailed by the actions of the customers in the marketplace. A company can’t raise prices if no one is buying and it generally only produces as much as it expects its customers to purchase.

Trends affect consumer choices. Those choices affect the market-driven aspects of companies producing the products and services that they make available to consumers. If the popular trends are to wear track pants and eat healthy, you may see demand at yoga clothing stores increase and the lines at McDonald’s getting shorter.

As a result, you’ll see yoga stores offering more products, charging more, hiring more employees, and staying open longer. You will also see McDonald’s roll out a new, healthy menu.

You can see social trends and consumer behavior all around you if you know what to look for. Here are some questions to get you started:

  • Which restaurant is suddenly popping up on every street?

  • Which stores at the mall have the longest lines of customers?

  • Which product are your friends suddenly talking about?

  • Where is everyone’s new favorite vacation spot?

  • Which regions are your colleagues suddenly avoiding?