First of all, what exactly are Penny Stocks? Lets look at the definition.
A Google search reveals Penny stock to be “a common stock valued at less than one dollar.”
Well, we beg to differ, a penny stock is a common stock PRICED at less than one dollar, valuation or the worth of the stock is a different matter all together. If that makes sense to you, you are already half way to being a successful investor, by simply understanding the difference between stock market price and a stock’s true value.
Typically, people dabble in Penny Stocks to speculate. Because the price of the stock is low, stock price movements tend to give huge gains (or huge losses for that matter) in short periods of time. Is this a good idea?
The answer is no, Penny Stocks speculation doesn’t work for most people. Why?
1. Speculation never ends well
Some people use trading methods to gain from short term price movements. While there is a science behind that, most people who “trade” don’t actually have the right skillsets, tools or even environment to gain a significant advantage. If you’re just going in based on a pure feeling (which most of the people do), it’s unfortunately going to end badly for you.
2. Overconfidence kills
Sometimes, people do profit from speculation. After all, its a 50/50 whether a stock goes up or down in the short term. However, winning the time round with no clear reason why you profited often gives speculators an unrealistic expectation on their own abilities! Continued “betting”, often with bigger and bigger sums will lead to huge losses!
So, is there truth in Penny Stock investing?
1. Yes, there are fundamentally good penny stocks as well.
The price of a penny stock has nothing to do with it’s underlying business quality or value. If you can invest in a fundamentally good Penny stock, it can still provide you with great returns! The downside is, Penny Stocks tend to be volatile.. As an investor, if you can understand that volatility is not to be feared, then you can beat this!
2. Small Caps can be great growth opportunities!
Small caps are companies with a small total price, if you buy up all of its shares. For example, Company ABC’s total shares on the market are worth 200 million dollars, therefore it is a Small cap stock. Historically, small caps are known for excellent growth opportunities provided they are good businesses!
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