On one Thursday in August, more than 10% of all U.S. stock-market trading volume was in shares of Gevo Inc., a little-known renewable-fuels company.
The stock popped to $1.82 from 55 cents that day after the company announced a big contract, triggering a surge in volume. Much of it was at off-exchange venues where retail brokerages route orders—a sign that hordes of individual investors were trading the stock, according to Rosenblatt Securities.
“It surprised the heck out of us,” said Gevo Chief Executive Patrick Gruber.
Trading in speculative stocks with low share prices has surged this year, fueled by a huge influx of individuals using zero-commission investing apps and online brokerages. During several months this spring and summer, more than 25% of the shares traded in the U.S. stock market were in companies with a share price below $5, according to data from the New York Stock Exchange.
From 2012 to 2019, that percentage mostly hovered between 10% and 15%, the NYSE data show. In September it fell to 17.1%, still high by historical standards.
Companies often try to avoid having a share price below $5 because of a perception that such stocks are risky “penny stocks”—even though, legally speaking, that term only applies to stocks that aren’t listed on exchanges. Asset managers, like mutual funds, often shy away from sub-$5 stocks.
That is why individuals play an outsize role in low-price stocks. Individual investors fueled unusual rallies this year in stocks like Eastman Kodak Co. and bankrupt car-rental company Hertz Global Holdings Inc.
To be sure, some of the activity in sub-$5 stocks was caused by the coronavirus-driven selloff in February and March. That temporarily sent some big stocks like Ford Motor Co. and Sirius XM Holdings Inc. below the $5 mark.
But many of the most actively traded stocks this year have been small companies—like Gevo, which has a market value of less than $150 million—that get intense attention on Twitter accounts and Reddit forums devoted to penny stocks.
Gevo was heavily cited in tweets on Aug. 20 after it announced an agreement with the U.S. arm of commodity-trading giant Trafigura Group Pte. Ltd. and its shares skyrocketed. The stock has since given up some gains. It closed Thursday at $1.21.
Individual trading activity began to soar in late 2019, after the brokerage industry shifted to free stock trades, and it accelerated this year after the coronavirus forced millions of Americans to stay home with little to do.
Retail activity has accounted for almost 20% of trading volume this year, nearly double the level from 2010, according to Bloomberg Intelligence. JMP Securities estimates some 10 million new online-brokerage accounts have been created in 2020, about half at Robinhood Markets Inc., whose app is popular with younger investors.
Zero-commission trading has fueled a boom in low-price stocks because it attracts less-affluent investors into the market, said Anthony Denier, CEO of Webull Financial LLC, which offers a trading app with about 750,000 active daily users.
“If you have a $500 account, you can’t buy one of those highflying S&P 500 names. But you can get into, and speculate in, some of these cheaper names,” Mr. Denier said.
Webull says about 56% of the U.S. stock trades it has handled this year have been in stocks priced at $5 or lower.
Most brokerages won’t say how many of their investors hold low-price stocks. But data from Atom Finance, a financial-technology firm that supplies consumers with investment research, suggests such stocks are especially popular at Robinhood.
In August, 57% of Robinhood accounts held stocks priced below $5, compared with 14% at Charles Schwab Corp. and 16% at Fidelity Investments, Atom Finance estimates. Atom gathers such data by connecting to the brokerage accounts of its more than 100,000 customers.
A person close to Robinhood said Atom’s estimate was skewed because Robinhood gives users free shares of stock when they refer new customers to the company. Not including such promotional giveaways, about 30% of Robinhood accounts hold sub-$5 stocks, the person said.
Robinhood says trading of sub-$5 stocks on its app has declined in recent months as it has rolled out fractional trading, which lets investors own slices of stocks that may cost hundreds or thousands of dollars for one share.
Matthew Bradley opened a Robinhood account in May and has become an avid trader of cheap stocks. A 37-year-old father of two who lives in Lancaster, Ohio, and works in information technology, he often rises at 5 a.m., makes coffee and hunts online for trade ideas.
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“It’s a great feeling to find something obscure and make gains on it,” he said. Last week, a friend mentioned one such stock: Pioneer Power Solutions Inc., a small New Jersey-based maker of electrical equipment. Mr. Bradley bought it at $4.80 a share and sold the next day for $6.51, making a small profit.
He wasn’t alone. Daily trading volume in Pioneer was nearly 294 million shares on Oct. 6, the day he made his purchase, according to Rosenblatt Securities. That made it the most actively traded stock in the entire U.S. market, representing 2.8% of total volume.
Pioneer shares more than quadrupled to $6.89 during the three days ending Oct. 7. They have since lost more than half their value, closing at $3.25 on Thursday. There was no clear driver for last week’s rally, but there was a storm of social-media attention. An analysis by Meltwater, a global media-intelligence firm, shows that hundreds of tweets mentioned Pioneer’s ticker, PPSI, on the morning of Oct. 6.
Pioneer didn’t respond to requests for comment.
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