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Don’t Ignore the Reddit Penny Stocks Bonanza of 2021Want to make mind-boggling returns on a black-box investment? How aboutthrowing $500 at a Reddit penny stock. Most of the time, that amount wouldhave gone nowhere. But, had you bought HUMBL (OTCMKTS:TSNPD) in October, theblockchain startup would have turned that $500 into $3.4 million today. Manyother picks saw equally notable gains this year.Source: ShutterstockFor decades, the sleepy world of penny stocks drew yawns from Wall Streetinvestors. Few “real” investors risked shopping in the graveyard of de-listed,zombie companies. But 2021 has changed all that. With the rise of retailtrading, regular investors have become kingmakers of the over-the-counter(OTC) and penny stock world.Much of the investment will still go to waste. The average penny stock loses60% per year, according to long-running academic studies. But investing ineven one of these winners will cover these losses a thousand times over. Somemay even become world-beating companies; rising stock prices allow cheapercapital raises, planting the very seeds that pave the way to success.InvestorPlace – Stock Market News, Stock Advice & Trading TipsReddit penny stocks aren’t for everyone. But for those looking to invest,here’s how to stay ahead of the curve.### The Rise of Reddit Penny Stocks InvestingMany investors can’t even agree on a proper definition of a penny stock. Somelook at a stock’s primary exchange: Companies listed on OTC markets aregenerally illiquid and low-priced, making them an ideal definition of “pennystocks.” Other investors look at a stock’s price: Anything below $5 will cutit for most. (Those with bigger pocketbooks might accept any figure below$10).Regardless, investors broadly agree that penny stocks are low-priced, riskycompanies that can return thousands of percentage points.And that has made them extraordinarily tempting targets for risk-taking Redditinvestors seeking quintuple-digit gains. The first week of February, forinstance, saw more OTC trading than during the first six months of 2020combined. Today, stocks below $5 together are now worth $2.3 trillion,according to GuruFocus, a stock tracking website. Add stocks under $10, andthe figure increases to $6.5 trillion. Put another way, cheap stocks are nowworth as much as the Big 4 tech firms combined.Story continuesReddit penny stock trading volumesSource: Data courtesy of OTC MarketsThat shift has made some lucky investors phenomenally rich. A basket of thetop-10 OTC stocks has returned 24,100% in the past six months, far more thanthe modest 37% gains for the best S&P 500 performers.Want in? You’ll need a particular set of skills that’s unlike anything WallStreet investors have ever considered.### Riding the Reddit Penny Stock TrainIn a world where a firm’s entire market cap gets dictated by its last tradeprice, a small number of dedicated retail traders can send a stock flying in arandom direction. And as r/WallStreetBets investors proved to GameStop’sshort-sellers, this so-called “dumb money” can wreak havoc on a hedge fund’sbest-laid plans.With penny stocks, Reddit has taken this a step further. Since 2020,subscribers to the popular thread r/PennyStocks have grown ten times over to1.4 million people. And where r/WallStreetBets (WSB) might have influenced thedirection of several dozen stocks, the penny stock crowd has made kings out offar more. According to Unbiased Stock, a Reddit stock tracker, r/PennyStockstypically covers three times the number of stocks that WSB does, despitehaving far fewer subscribers.The size of these companies also matters. The typical pick on r/PennyStockscomes in at just $310 million, compared to $10.5 billion for WSB, makingRedditors with high karma (a measure of Reddit influence) the literalkingmakers of the penny stock world.By following these highly influential accounts, investors can front-run themarkets much like how high-frequency traders once used President DonaldTrump’s tweets to earn alpha.Take 88 Energy (OTCMKTS:EEENF), for instance. The long unprofitable Alaskanoil company saw shares rise from $0.0001 in January to 2 cents after gettingpicked up by the subreddit.Any lucky soul who bought the 467,500 traded shares on Jan. 7 might haveturned $50 into $10,000 (assuming they could achieve the $0.0001 price). Butwas 88 Energy’s sudden rise well-warranted? Heavens knows. The only importantthing was that influential Redditors were actively promoting the stock.### Are Penny Stocks Legitimate?Many skeptics might see this as a return to the “bad old days” of boiler roompump-and-dump schemes. Back then, stock promoters would call up unsuspectinginvestors to hard-sell worthless companies. Even now, the SEC finds itselfmired in stamping out hucksters using social media to promote stocks theysecretly own. (In the case of celebrities like Elon Musk promotingcryptocurrencies, the water gets even murkier).But Reddit’s r/PennyStocks crowd is something different. Most are regularJoes, looking for a like-minded community to share ideas. Many of the postsalso border on parody — a product of the free-wheeling, fun-loving nature ofthe social media site. And while a few members turn out to be financialprofessionals – RoaringKitty, GameStop’s biggest Reddit promoter, was a FINRA-licensed professional — most are in it as amateurs.As Reddit’s market clout grows, SEC and other regulators will struggle todifferentiate between pump-and-dumps versus legitimate commentary. Many ofr/PennyStocks calls rise for legitimate economic reasons. Others are moreborderline cases – was 88 Energy’s rise a case of mistaken identity, rampantstock promotion or an improvement in economic outlook? No one may ever know.But even as lawmakers continue to scratch their heads, one thing is clear:These market movers will only grow larger as more investors jump aboard.### How to Invest in Reddit Penny StocksMost people will rightly turn their noses on penny stocks. Instead, they’llattempt to follow time-tested advice: Fund an IRA and buy a combination ofindex funds and highly profitable long-term stocks. S&P 500 ETFs, CSX(NASDAQ:CSX) and American Water Works (NYSE:AWK) come to mind.But what about those who want the potential for more significant gains? Ifyou’re looking to put in $50, $500 or even $5,000 into the OTC casino, Reddithas created a way for ordinary investors to profit.In the past, most penny stocks once followed a similar pattern: An inactivecompany would live in hibernation for years before inexplicably rising oninsider trading. The moment the reason got announced — usually via officialpress release — insiders would have already sucked out the upside, leavingother investors holding the bag.Reddit changes all that.Instead, thousands of cyber sleuths now patrol the web for the slightest hintsof price action. And instead of calling up investors one by one, these retailinvestors can use platforms like Reddit, Twitter and Discord to instantlyshare their thoughts with the entire world.Consider a high-profile case from late last month. When short-sellerHindenburg first targeted SOS Ltd (NYSE:SOS) on Feb. 28, shares of the Chinesecryptocurrency miner initially tumbled 25%. The allegations of outright fraudwere so damaging that even your author wasn’t sure whether SOS had a workingmining facility. Among other issues, the firm’s press release photos showedthe wrong crypto miners. The company’s official headquarters, meanwhile, ledinvestigators to a hotel room in central China.Reddit users immediately sprang into action. The following day, cell phonevideos of an SOS-branded mining operation began surfacing on Reddit and otherpopular stock discussion sites. As fear and uncertainty began to lift, SOSstock rebounded 70%, finishing even higher than before the Hindenburg piece.The video would eventually end up on the main SOS page, burnishing the newReddit detectives’ power.### Should You Invest in Reddit Penny Stocks?Plenty of bad agents will use these methods for personal gain – at least oneReddit stock promoter has already gotten hit by a shareholder lawsuit. Eventhe SOS saga hasn’t reasonably concluded yet.But for investors with an ear for Reddit chatter, following these trends andgetting out early opens the door to supernormal returns. It’s going to take awatchful eye. But investors looking for superior risk-return investmentsshouldn’t ignore the Reddit penny stocks bonanza of 2021.On the date of publication, Tom Yeung did not have (either directly orindirectly) any positions in the securities mentioned in this article.Tom Yeung, CFA, is a registered investment advisor on a mission to bringsimplicity to the world of investing.### More From InvestorPlaceThe post Donât Ignore the Reddit Penny Stocks Bonanza of 2021 appeared firston InvestorPlace.