Penny Stocks – Making Successful Companies

Almost every company started off as Penny stock company. It took every company some time to get to where it is now, even the mightiest of them all took time. So what did those companies do to become the big shots? What was the “thing” which changed the course for them?
Successful companies are not born, they are made. They have to work through the ranks like everyone else. Some investors find their “big thing” scouring through penny stocks in hopes of finding the next Microsoft or Wal-Mart.
What Exactly Is a Penny Stock?
In this article we’ll use the terms “penny trade stocks” or “micro-cap stocks” interchangeably. Technically, micro-cap stocks are classified as such based on their market capitalization while penny shares are looked at in terms of their price. Definitions vary, but in general a stock with a market capitalization between $50 and $300 million is a micro-cap. (Less than $50 million is a nano-cap.) According to the Securities & Exchange Commission (SEC) any stock under $5 is a penny stock. Again, definitions can vary; some set the cut-off point at $3, while others consider only those stocks trading at less than $1 to be a penny stock. Finally, we consider any stock that is trading on the Pink Sheets or OTC to be a penny stock.
The main thing you have to know about penny trades is that they are much riskier than regular stocks. For instance, junk bonds (bonds with a rating lower than BBB) are considered a much higher risk than those of investment grade (bonds with a rating higher than BBB). In the world of stocks the equivalent comparison is penny trade stocks vs. blue-chip.
What’s the Problem with These Stocks?
What makes penny stocks risky? Four major issues arise when you decide to buy these securities:
Lack of Information
One thing we always preach is that the key to any successful investment strategy is acquiring enough tangible information to make informed decisions. For penny share stocks, information is a bit difficult to find. Companies listed on the pink sheets are not required to file with the SEC and are thus not as publicly scrutinized or regulated as the stocks represented on the NYSE and the Nasdaq exchanges.
Hence it is important for you as an investor to keep yourself updated with regular stock tickers, penny stock tips and the list of ‘penny share stocks to watch’. This will increase your knowledge regarding the market and penny stock which are performing well and the others which have bright future in coming time.
No Minimum Standards
Stocks on the OTC and Pink Sheets do not have to fulfill minimum standard requirements to remain on the exchange. Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on major US exchanges, the company moves one of these smaller exchanges.
However the OTC does require companies to file timely documents with the SEC, while the Pink Sheets has no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies.
Lack of History
Many of the companies considered to be penny trade stocks are either newly formed or approaching bankruptcy. Therefore, many investors generally assume that these companies have a poor track record or none at all which magnifies their difficulty in picking the right penny stock.
On the other hand, companies trading in penny share stocks have many reports and press releases which clearly define company target and their potential in the market. There are many economists and experienced investors/ editors who are monitoring these companies’s daily move and generate articles and reports on their performance which again portrays their penny share potential.
Liquidity
When stocks don’t have much liquidity, two problems arise: first, there is the possibility that the stock you purchased cannot be sold. If there is a low level of liquidity, it may be hard to find a buyer for a particular stock, and you may be required to lower your price until it is considered attractive by another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate stock prices, which is done in many different ways – the easiest is to buy large amounts of stock, hype it up and then sell it after other investors find it attractive (also known as pump and dump).
On the other hand, US stock exchange is all about creating hype and attracting more investors. Companies which are not trading in penny stocks also play this game, in fact any business which wants to stay in the market and compete does this.
Buying These Stocks
Two common notions pertaining to penny trades are that many of today’s stocks were once penny stocks and that there is a positive correlation between the number of stocks a person owns and his or her returns.
Many believe that the investors who trade in penny stock companies consider the fact that Wal-Mart, Microsoft and many other large companies were once penny trade stocks that have appreciated to high dollar values.
But hasn’t it? Does it mean that stocks which are cheap are not worth buying just because people can easily afford them? People who believe this thought can never be a good investor because they will be buying expensive stocks and sell them as soon as they go a bit high. A good investor always invests where others are not paying attention and enjoys high gains alone.
The second reason that many investors may be attracted to penny stocks is the conception that there is more room for appreciation and more opportunity to own more stock. If a stock is at $0.10 and rises by $0.05, you will have made a 50% return. This together with the fact that a $1,000 investment can buy 10,000 shares convinces investors that micro cap stocks are a rapid surefire way to increase profits.
Which is true! Penny stocks can motivate an investor to stay in the market, therefore, many amateur or even rookie investors who want to enter the stock market starts from companies which trade in them.
Conclusion
Stock exchange is not every investor’s cup of tea, only the ones who have the heart to take risks and gamble while putting their interest into their desire stock can manage to stay. The investors who say penny share stocks are risky are absolutely right, but aren’t stocks (other than penny trade stocks) consisting factors of risks?