In my last blog, Is Investing in the Stock Market Gambling? I found that some penny stocks have lottery features, and purchasing them may be considered gambling. The characteristics of a lottery-type stock were identified, and one of the features is low liquidity, or low buy/sell volume which is a red flag that purchasing the equity may be gambling.

Does the fact that a penny stock has lottery-type features mean that you should not purchase them? I think it depends on the investor and his or her goals. But, understanding if a penny stock has lottery-type features or not is essential to becoming in tune with the reality of the situation.

In my book Stock Market Masters, I point out that phenomenal investors such as Warren Buffett are in tune with the reality of an investing situation and acknowledge it. The great investor’s reaction to the truth is what sets them apart from the average investor. Their trading or investing moves are based on their accurate understanding of reality which makes them incredible amounts of money and puts them in the legend category.

If you find that a penny stock has lottery-type features, what will your move be? I can think of ways to make money, whether it does or does not have lottery-type features. There are ways to exploit the reality to your advantage. It is up to the reader to figure out what those are.

This blog will focus on using a screener to find penny stocks that have low and high liquidity. The screener I will use is the free Yahoo Finance screener. But remember that the equities found in the screener may not be available on the trading platform you use. For example, in my discussion with a Meryl Lynch representative, I discovered that not all penny stocks are available. Because of the liquidity issue with some Penny Stocks being low, Meryl Lynch requires that all orders be limit orders for Penny Stocks. A limit order guarantees a trade at a specific price; otherwise, the trade is not executed and protects the buy and sell order from achieving an unrealistic price.

A ridiculous price for a transaction may happen if someone wants to unload 1000 shares of penny stocks purchased at 2 dollars per share with a market order, and there is low buy sell volume. If there are few buyers, then the price of the sale could be very low. Maybe 5 cents per share. If the transaction occurs, then the $2000 purchase becomes a $50 sale. Ouch!

Low volume burned many people who had stop-loss orders in the Flash Crash of 2010. I write about the Flash Crash and the issues with stop-loss orders in my book Crash Proof Your Investment.

To find the penny stocks that have low volume go to the Yahoo Finance screener at the following link:

https://finance.yahoo.com/screener

Next click the create screener button and set up the filters as shown in the figure below:

The filters are

Region = United States,

Average Volume for 3 Months is less than 1000,

Price is less than $5,

Sector is Technology

Market Cap is less than 31 Million dollars

Clicking the find stock button yields 52 equities to consider. From the list, I looked up the company Duo World Inc with ticker symbol DUUO. The wide bid-ask spread indicates the low liquidity of the stock.

A buyer is willing to buy 100 for $2, and a seller is willing to pay $28 for 100. The spread is 1300 percent of the lower stock price. [ (($28-$2)/$2)*100 percent ]. This illustrates why limit orders that guarantee a specific sale price are important to use in this case.

To find the penny stocks that have high volume, set the screener up as shown below:

The filters are

Region = United States,

Average Volume for 3 Months is greater than 1000000,

Price is less than $5,

Sector is Technology

Market Cap is less than 31 Million dollars

Clicking the find stock button yields 52 equities to consider. From the list, I looked up the company Cemtrex Inc with a ticker symbol CETX. The wide bid-ask spread indicates the low liquidity of the stock.

A buyer is willing to buy 100 for $102, and a seller is willing to pay $105 for 100. The spread is 3 percent of the lower stock price. [ (($105-$102)/$102)*100 percent ]. In this case, using the market order is less likely to end up with a price for the transaction that is unfair.

In summary, I presented the Yahoo Finance screener to look for penny stocks with high and low buy/sell volume. Understanding the reality of your equities is very important, so you can react well to the reality and increase your odds for success.

Good luck with your financial goals,

Dr. Paul Keller.