Penny stocks are an exciting and profitable investment vehicle for many reasons. With low share prices and high volatility, penny stocks can reap huge rewards. If one can get on the right track, they can easily turn a few thousand dollars into tens of thousands quickly. An investor can expect great moves in share price in a relatively short time period. Additionally, they are one of the best ways to get into America’s brightest new companies before they hit the big time.
A “penny stock”, also referred to as a “micro cap stock” or a “nano cap stock”, is a security which is issued by companies with a small market capitalization. Although one can find many different definitions of a penny stock, generally these stocks represent companies with a market capitalization in the $10MM to $100MM range. Somewhat misleading is the United States Securities and Exchange Commission’s (SEC) definition of a penny stock as stock which trades below five dollars ($5.00) per share. As many large cap companies including Sprint (NYSE: S) and Citigroup (NYSE:C) among others, trade below this price point (especially in recent recessionary times), an analysis of market capitalization provides a more accurate measure of a true penny stock. Another clear definition of a penny stock among industry insiders and regulatory bodies is a stock which trades on the NASDAQ OTC exchange or via the Pink Sheets quotation system.
Traditionally, penny stocks were considered a speculative investment, however today they are increasing in popularity, mainly due to increased regulation and the technological revolution making analysis of trends and data more accurate. Investors of all skill levels are accessing the Pink Sheets and OTCBB marketplace and are making these investments a larger portion of their portfolio. There are some disadvantages in the penny stock world, but none different then those which exist in the mid and large cap markets.
A couple of quick pieces of advice to avoid the downside of micro cap stocks. Primarily, be aware of the hype created by unscrupulous internet and print media. The age old pump and dump strategy is alive and well in the Penny Stock markets, so due diligence is a must. A lack of detailed regulation is another primary reason to be well educated before buying these stocks.
Successfully trading penny stocks is much like investing and trading any other security. A solid knowledge of the company and industry to which you are investing is paramount to profitability. However, the penny stock markets contain much more volatility and these stocks act and react to market conditions with a much greater fervor. This can provide the investor with some additional risk, but with proper knowledge, also provides a much greater opportunity for profit.
As with all stock trading, every decision will not be correct, even the most experienced traders who have watched the markets for years and have tracked and analyzed the historical data on a particular security knows that there is risk in trading any stock. However, those same traders have also realized large gains in short periods from investing in penny stocks.
Now that we have reviewed a general understanding of penny stocks and the risk and reward which comes from investment in this type of security, let’s more clearly define what makes investment in penny stocks a unique opportunity.
- The Storyline. Most penny stocks are small, start up entities which are formed to realize growth in an industry sector which is emerging. You would never find a new penny stock issued on an exchange which promoted the delivery of mail by horseback. Today’s penny stocks are generally technology, bio technology or finance (stocks, commodities, etc.) related. As a small company, it is easier to gain access to the information necessary to analyze the potential success of the Company. Whereas AT&T might deliver thousands of goods and services a penny stock company is usually promoting one idea or concept. Analyzing the proprietary information, target markets and potential revenue on such an entity would more easily result in a definitive investment strategy.
- Penny stocks lower the amount of potential loss of capital. As most penny stocks are offered at a lower price per share, investors can reduce the amount of capital spent on any transaction and diversify their portfolio into other investments. Although investing in any stock carries with it a level of risk, the potential for losses is reduced. However, this does not necessarily reduce the potential for profiting on the upswing of the stock.
- Tracking the Float. Share prices on stocks of all sizes, including penny stocks are directly correlated to the amount of available shares in the float. It is a simple supply vs. demand equation. As shares are purchased at the marketplace, the amount of available shares for purchase declines and hence share price increases. Although many penny stocks lack daily trading volume, the available supply of shares in the float is easily analyzed using a variety of online resources.
- Confidence breeds profits. When an investor has completed his due diligence and believes he has a strong penny stock selection based on good research, then by virtue of a lower share price, the investor can buy more shares and take a larger position in the company. This will help not only with gains as the share price increases, but also with exercising trading strategies. More shares provide more flexibility when opening and closing positions.
Penny Stocks provide an excellent vehicle for individuals to enter the investment arena with outstanding upside potential and relatively low barriers to entry. As with all investment strategies it takes good intelligence and patient trading to reap the full rewards. Being thoroughly informed on the financials, management, strategic plans and the proprietary products and services of a Penny Stock company is the ONLY proven method to win in micro-cap investments. There are no get rich schemes in penny stocks, but with solid investment choices, patience and attentiveness to your holdings, penny stocks should provide you with large and lasting returns.