TWO THINGS MATTERS DUE DILIGENCE AND GOAL TO DISCOVER THE PENNY STOCK GEMS
While Investors decide to invest in small denominations then mostly penny stocks are their first choice. Penny stocks are those stocks which are traded in the stock market at very low value. Many small investors go for penny stocks because of their affordable low price and they try to discover fruitful nuggets. But the bottom-line here’s penny stock is one of the riskiest sector of capital market. As the increase value of stocks give highest profit same-time the decrease value of stocks can also hand-over great lose to investors. That’s for penny stock investors; these low priced stocks are both a chance and threat. These unpolished financial instruments mostly subjects to debate because of their highest risk element. Now the questions may be - is it worth to invest in penny stock? OR Is trading penny stock for livelihood possible? Let’s discuss the penny stock concept to know about it a little bit more.
WHAT IS PENNY STOCKS
Penny stocks! As the name denoted itself those stocks which are traded for pennies or for less than $1. But its definition or concept is not limited here.
Penny stocks ( Which is also known as cent stocks or micro cap stocks) are shares of small companies traded for very low price. The value of penny shares may vary from pennies to as much as $5. Mostly companies which are very young or less growing offer penny stocks for sell in the capital market.
In past pennies stocks are denoted the stocks traded in the stock market for pennies or for less $1. But as being very low in value the definition of the penny stocks is devised. That’s as per the U.S Securities and Exchange Commission, stocks which are traded at $5 or below value fall under the category of penny stocks. Then why these denoted as penny stocks if value is more than $1?
Even though these stocks are traded above pennies but their trading nature is perceived similar to penny stocks – very risky and illiquid in nature. Buying penny stocks means you are investing in small growing companies which mostly have limited cash and resources. These companies mostly quoted penny stocks on OTCBB (Over The Counter Bulletin Board) and Pick Sheets rather then on National Stock Exchange.
What are the penny stock potentials and risks?
Penny stocks are mostly considered one the riskiest and fade investment in the capital market. But still many small investors try to invest their hard saving in these speculative stocks. Why?
It’s not wrong to denote penny stocks as faint investments but other side it’s hard to overlook its high returns. Let’s discuss with example
Suppose a small investor wish to invest $1000 in stocks. He has two options one to buy a well reputed A company stock higher in value or secondly to invest in small B company’s penny stock.
Company A offers shares at rate of $100 each but other hand Company B offers shares at rate of $4 each. Let see the financial prospective in each situation:
If Choose Company A (Big Company)
Per share value - $100
Total amount investor wish to invest - $1000
Total shares investor will get - $1000 / $100
= 10 shares
Means he will get only 10 shares of company A which is smallest proportion in company’s shares ownership. Now suppose if company prices rise to $102, the investor can earn only 2 x 10 = $20 profit. Or if same decrease by $2 the he will to bear $20 loss.
If Choose Company B (Small Company)
Per Share Value - $4
Amount to Invest - $1000
Total Shares Investor Will Get -$1000 / $4
= 250 Shares
Now if company B shares value mounts to $5, then the investor can earn up to $250 which is much more then $20. But the same time if shares value decrease by $1 then loss is also higher.
That is reason that small investor try to discover hidden gems in this riskiest segment of capital market. Moreover, they have not sufficient funds to invest in big company’s shares because high cost and no one will give them only 10-20 lots of shares. For that type of investor penny stocks is like a torch of hope to earn some extra bucks.
Pros and Cons of Penny Stocks Investment
Penny stocks investment is mostly considered as fade investment while comparing to well design traditional investments. One of the major reasons is highly volatile in nature. If anyone decide to invest in penny stocks means that person is just playing a game of speculation if you pick right one then you can double your earning but if fail means chances may be to block entire investment. Still investors show their interest in penny stocks because of their attractive low price and temptation of high returns. In other words you can say they just try to discover the fruitful nuggets among the chucks. Let’s quickly spot the pros and cons of penny stocks.
Pros
- Higher Rate Of Return – If Penny stocks are on positive moves it has potential to grow about 50% more rate of returns on investor’s investment than traditional ones.
- Easy to buy for small investor – Small investors can easily buy shares because mostly company’s shares starting rates are 0.50 cents per shares.
- Quick Results – The right penny stocks can prosper in few weeks and even price can rise higher.
Cons
- More volatile In Nature – Penny stock too much speculative in nature. If they can rise higher instantly in weeks or days it can down instantly due to any reason.
- Illiquidity – If the moves of stocks are less the chance of illiquidity is higher. Means you can’t exit the shares if there is no buyer.
- High Manipulations – Penny stocks are well famous for high manipulations. Many times management just use pump and dump schemes to raise the demand of shares.
- Lack of Information or risky company’s – Mostly stocks is traded of pink sheets where company has no need to furnish the financial or operating information.
How Can Buy or Invest In Penny Stocks
Buying penny is not hard job like its choice. If any you make mind to invest in penny stocks you can buy these shares through normal share brokers. However before buying penny stocks you must analysis the company’s information in depth. And one thing you must keep in mind that penny stock is one of the riskiest investments that’s it’s wise to invest a small proportion of your savings in these stocks. And this type of investment should consider as supplement to your primary secured investments rather then taking it as primary investment. Let’s see how you can buy Penny stocks:
- First decide how much you want to invest and which company’s penny stocks you want to buy.
- Set up (Register) your trading account with a trading platform or if you have already then use the same to buy penny stocks.
- Once you set up account deposit enough money in your account. Now you are ready to buy the penny stocks. Choose the selected company’s penny stocks and quantity of shares to buy.
(Mostly brokers are assigned to buy stocks who charge commissions to facilitate the trade)
Things to Be Remembered While Buying Penny Stocks
1. Don’t Make Your Primary Investment: -
As mentioned penny stocks are very volatile in nature with high profit expectations losing higher is also possible. So it’s best to choose them as secondary short term investment instead long term primary. Means you should invest high proportions of your savings in secured and traditional investment and just use small proportion to invest in penny stocks. Basically it’s recommended by experts just to invest 10% of your total equity.
2. Believe On Yourself Means Only Yourself: -
One rule to invest in penny stocks never believe on whisperings or success stories of penny stock investors. It’s better to make proper and detail analysis of company’s financial data and make portfolio yourself or with the help of experts. That is because the chances of frauds or manipulation in company’s penny socks financial data are possible to attract the investors.
3. Ignorance not allowed or Sell Quickly: -
You know the best strategy for penny stocks is just exit entire or small proportions of stocks while there is rise in the prices to claim profits. Don’t wait for further price rise because this ignorance may prove fade decision. Buy and forget nature is not allowed here (keep your sharp eyes on stocks values) as being very violate in nature it’s better to trade while shares values increase.
4. Buy Stocks with High Volume: -
Penny stocks with low volume trading – say no. It’s better to stick with penny stocks which have high volume of monthly average trading. Let suppose you buy 5,000 penny shares of x company. The company daily or monthly average trading volume in the market is about 10-15 shares. Now what? Assume if company prices rise to 20%-40% and to exit the shares you will not find the many buyer's of shares. In other side you can say the company’s stocks are illiquid. That’s along with shares prices it’s vital to check its daily and average monthly trading volume. As per expert’s sayings - stocks which has value less then 50 cents per share and below 100,000 monthly average trading volumes is highly illiquid.
5. Don’t believe company’s Management Do Own Research
Penny stocks are mostly listed on OTC and Pick Sheets rather then on traditional major stock exchanges. Why? The company listed on major stock exchanges as NASDAQ and OTC-BB need to meet variety of tiers. As these company needs to explore financial data, need to maintain minimum price of shares plus also have to pay fees if company fails to meet the standards the company can be delisted from the NASDAQ and OTC-BB.That’s most of younger and less growing companies are listed on OTC and pick sheets where they does need to furnish their financial data and no need to maintain minimum price. In that case it’s highly Chances Company’s management can manipulate the financial data to attract the buyers. That’s it’s better to search in dept about the company where you decided to invest.
6. Use small portfolio for penny stocks
Usually for investment purpose the one of the best suggested strategies is diversification. But it’s not highly applicable in case of penny stocks. As being best for short term investment it’s better to invest in about 2-3 penny stocks rather then increasing diversification to10-15. This will help to have sharp eyes on movement of different companies quickly. Plus you can think strategically.
7. Read SEC Set Rules
Before buying penny stocks investors must read the rules and regulations set by U.S Securities And Exchange Commission for broker that must be complies before they sell stocks to you. Read Under the section15 (h) of the securities Exchange Act Of 1934
Strategies to Identify Best Penny Stocks
Instead of flipping coins or judging your luck on this riskiest segment of investment it’s better to do homework to find the penny stocks gems. There are some strategies which can help to identify the best penny stocks. These strategies are not cent percent proved but still can help a lot to protect from manipulated or fraud stocks. Let’s briefly discuss these stratagems
Company’s Share Valuation & prices
Penny stocks lucrative low prices easily attract the small investor. And this is one of mistake while investor just ready to invest because of low price and without searching about company’s outstanding shares. Yes! That’s actually. Let explain why considering company’s outstanding shares are vital? Company outstanding shares are those which are actually issues for publically sell and buy. That’s more outstanding shares means more shareholder of shares in market. This will lessen the illiquid risk of shares. It’s good to find monthly trading volume of shares to know exact trading moves of shares.
Shares Dilution
Consistence Dilution in company’s shares is danger for small investor. What is shares dilution? Let explain with example – Suppose to raise $100000 capital company issues 200000 shares at 0.50 cent per shares. But later on to raise Capital Company issues new lot of 50,000 shares. Now company’s share prices will lower to {$100000/250000 shares} 0.40 cents. Means number of total shares raises from 2,00,000 to 2, 50,000 shares and new price lower from 0.50 cents to .40 cent but company’s total capitalization remain same as $1,000,00. So it’s vital to find company with strong shares structure otherwise constant dilution effects the share prices plus percentage in company’s ownership.
Company earning’s
Only profitable company can offer some profits to its shareholders. That’s it’s better to collect the earning report of company to know about its operating. The company’s earning reports can help to know about its future prospectus. The rules just believe on yourself is mostly apply here. Try to find out as much as information about financial condition of company yourself. Because chances of manipulation is more in order to sell the share lots. Try to find out the fair value of shares with price to earning ration or net profit ratio. Because some time company’s facing loss just overvalued the share to manipulate.
Try to Avoid pink sheets penny stocks
Instead of Pink sheets and OTC penny stocks are also traded at National Stock Exchanges. It’s better to avoid stock traded at Pink Sheets and OTC because these stocks are risky. As stocks quoted here does not need to fulfill any standards in respect to financial data or risk that’s more chances of manipulated information. It’s good to stick with penny stocks quoted at NASDAQ and NYSE because you can get exact financial position of company rather then manipulated data.
Ignore Dividends
Many times penny stock companies offer lucrative dividends. If you are thinking to buy penny stocks then it’s better to avoid these dividend offers and make a detail analysis regarding company’s working and financial conditions to invest.
5 Trending Penny Stocks for 2016
Here check out the five trending penny stocks for the 2016. These are the company’s whose shares are below $5 dollar.
1. Nevsun Resources Ltd.
Market capitalization: $609, Earning per share $0.35, Headquartered in Vancouver – Canada,
2. The Wendy’s Company
Famous hamburger joint operates world wide, Market capitalization: $2.38 Billion, Earning per Share: $0.31
3. The AES Corporation
U.S based company, Market Capitalization: $7.01 billion, Earning per Shares: $1.27
4. Kimball Electronics, Inc.
Technology Sector Company, Market cap: $349 Million, Earning Per Share: $0.89
5. Xcerra Corporation
Tech Company, Market capitalization: $349 Million, Earning per Shares: $0.52
Forex vs. Penny Stock – Which Investment is Best
Penny stocks and Forex both are appealing potential investments pitch for Investors. When investors are planning to invest in small denominations then Forex or Penny Stocks are most likely to attract them. Penny stocks and Forex trading both are best opportunity for small investors to diversify their saving to earn extra bucks. But it’s very common question that may knock any investor mind – Which one is best? Let’s have a brief idea about investing potential of both investments.
• Margin trading – In case of Forex trading investor get the opportunity to trade on leverage. Means they can use borrowed funds in order to earn higher profits. In other words they have opportunity to invest more even with lower amount. But in case of stocks such types of leverage are not offered.
• Liquidating market – Forex market is one of the largest liquid markets. Means no fear of illiquid as in case of penny stocks.
• Financial data – No bother regarding collecting the financial data of trading pairs because information is so transparent can be collected easily.
• Illustrious – Forex trading is one the famous segment of capital market among the investors. But penny stocks is not first decision of most investors.
• Higher profits – If penny stocks are best one then investors can make huge profits with their shares as comparison to Forex trading.
• Limited Loss – In case of penny stocks loss are limited to invested amount. But in case of Forex trading if proportion of leverage is increased then one can loss entire amount instantly if market moves negative. But this is only in case leverage otherwise it’s in safer zone.
Now which one is best? This depends upon the risk bearing ability of investor. If investor is ready to bear higher risk of penny stocks then he can opt but after dept analysis. On the hand if investor not ready to face the sharks of penny stock it’s better to choose Forex Trading. Both investments are speculative and risky in nature but still in case of Forex trading you can choose diversified portfolio to earn profits plus it’s easy to get reliable information.
Is It Wise Decision or Is It worth to invest In Penny Stock
The very old and proved theory of capital market is high returns mostly followed by high risks. And same is applied in penny stocks. These small cap stocks have dull reputation because of most frequent fraudulent activities. It is said to minimize risk in capital market diversified portfolio can help. But in case of penny stocks one of the hard jobs is to identify the genuine company.
That’s said if you are thinking to buy penny stocks it’s better to do your homework first. What’s homework? Yes, to find out gems among the worthless one need commitment of due diligence and through research.
Penny stocks are mostly better for short term trading investment instead of long term investment. This is most crucial factor of penny stocks. It’s better to exit whole or partially shares if there is positive rise in shares prices to participate in profits. Because the expectation of higher profits sometime prove wrong.
That’s we can’t say penny stocks are completely worthless investment rather it can prove high yielding investment if one get success to dig the right gem.
( THIS ARTICLE IS JUST FOR REFERENCE PURPOSE DON'T TAKE IT AS PROFESSIONAL FINANCIAL ADVICE)
