How Might You Explain A Penny Stock

Posted by Credit expert

October 30, 2010

How can we define a small cap stock? The typically recognized definition is often a stock who’s market capitalization is between $250 million to $1billion. Unfortunately, that explanation doesn’t show you the reason why penny stocks are very popular.

For the inexperienced trader, or perhaps somebody with a small portfolio, penny stocks can certainly appear to be the right investment.

Small Cash Investment

Considering the majority of penny companies trade below $5 (with many trading sub $1 - hence the favorite term penny stocks), it is simple to generate a diversified collection of penny stocks. As a result, it doesn’t take much momentum to generate 100%-1000% results. The downside - it doesn’t take much for you to lose half of your portfolio if a person dumps his or her shares in a hurry.

The Next Big Thing

So, who wouldn’t wish to have the ability to claim they got in to the next big stock - it is all about the bragging rights. Additionally, if you took a position in a company at $.10, you will be 5.00 a share plus.

No Institutions

Most mutual fund companies have rules in place that wont permit them to own stocks which trade above $5.00 - that means you wont have to worry about an institutional investor getting rid of their positions, putting pressure on the stock price dramatically.

It’s All About The Size

Make sure - penny stocks are certainly not just something that trades under $1 - you will find microcaps and even nanocaps that one could trade - just take into account that they are generally not very liquid - making it harder to accumulate a position, and more importantly, get out of a position. You may want to check to see if it is also listed as a pink sheet(pk) - generally nanocap and microcaps stocks are valued at that level for a reason: bad financials - which is assuming they’re even filing them.

There is roughly 1600 penny stocks to pick from - supplying you with with plenty of choices. Then again, only 350 roughly trade with a 50 day average volume of 500 000 - nevertheless, a lot of excellent choices. Keep in mind, small caps have over time outperformed larger caps.

Some Caution

You might find that a few small caps may not be start ups - instead, are past large caps - avoid these types of past glory stocks - you want corporations who not only have a great idea, but have a rising customer base (that of course are spending money for the company’s products). Look for growth rates having a minimum of 20% and at the minimum, positive EPS.

Volume will continue to be your biggest obstacle - stay with shares where the average volume is 500 000 so you will not have to worry about dropping the bid price too much when you sell for big gains.

Remember, whether or not you refer to them as penny stocks, microcap stocks or small caps, these are generally high-risk investments and should just take up an extremely modest percentage of your overall portfolio.

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