How Would You Explain A Penny Stock
Finance September 25th, 2010How can we define a small cap stock? The commonly accepted definition is often a stock who’s current market capitalization is between $250 million to $1billion. However, that description isn’t going to reveal exactly why penny stocks are quite popular.
For the novice trader, or perhaps someone with a small stock portfolio, penny stocks can appear to be the right investment.
Little Cash Investment
Given that many penny stocks trade under $5 (with several trading sub $1 – hence the favorite term penny stocks), its simple to generate a diversified stock portfolio of penny stocks. As a result, it does not take very much momentum to generate 50%-100% gains. Obviously – it does not take much for you to lose 50% of your portfolio if someone else dumps his or her shares in a hurry.
The Next Big Thing
What person wouldn’t really want to have the ability to point out they got in to the next big stock – its all about the bragging rights. Additionally, if you ever bought a position in a stock at $.10, you’re making 5 a share plus.
No Institutions
Many mutual fund companies have got regulations in place that wont permit them to buy stocks which trade over $5 – meaning you dont worry about an institutional investor getting rid of their shares, putting pressure on the share price dramatically.
Its All About The Size
Make sure you remember – penny stocks aren’t simply whatever trades under $1 – you will discover microcaps and even nanocaps that one could trade – just take into account that these stocks typically not very liquid – making it even tougher to amass a position, and most importantly, exit a position. You want to confirm if it is also trading as a pink sheet – typically nanocap and microcaps stocks are priced at that level for a reason: inferior financial records – and that’s assuming they’re even filing them.
There are about 1600 penny stocks to choose from – supplying you with with lots of choices. Then again, only 350 or so trade with a 50 day average volume of 500 000 – still, a great deal of excellent choices. Don’t forget, small caps have over time outperformed large caps.
Some Caution
You may find that some small caps aren’t start ups – rather, are ex – large caps – try to avoid these kinds of former glory stocks – you would like companies that not only have got a good idea, but have a rising customer base (whom of course are spending cash on the firm’s products). Search for growth rates of at least 20% and at the very least, positive EPS.
Volume will continue to be your most important challenge – stay with stocks where the average volume is 500 000 and you wont have to worry about dropping the bid price too much when you sell for large profits.
Remember, regardless of whether you refer to them as penny stocks, nanocap stocks or small caps, these are high-risk investments and really should just take up an extremely tiny portion of your present stock portfolio.
