Investing in the stock market
Investing in shares or stocks is one of the most profitable ways of making your money work for you.
From all the asset classes of investment (property, cash, bonds, etc.) stocks have proven through the decades to deliver the best yields.
A fundamental truth about investing in stocks is that you primarily invest in a company. When you buy or sell a stock, your judgment should be determined by your fundamental assessment of the company and not by the opinions or actions of other investors and analysts.
Investment in penny stocks
Penny stocks are also known as small caps, micro caps or nano caps. They are essentially inexpensive stocks in small companies. They have the capacity to grow astronomically, because small companies can grow much faster than big, established ones.
When is a stock a penny stock? This will differ from country to country and market to market. At one time in the USA stocks that were cheaper than one dollar were generally regarded as penny stocks. Presently up to five dollars constitute a penny stock, in accordance with the description of the Security and Exchange Commission (SEC). As a general rule you should only invest in listed penny stocks.
Take note that penny stock investing is not the same as day trading. Day traders do not necessarily buy and sell exclusively penny stocks. And penny stock investors as a rule do not trade exclusively on a daily basis.
There are convincing reasons why penny stocks can enhance your investment portfolio:
- You can make enormous profits in a very short time. It is not unusual for a penny stock investor to buy a stock for $1.50 and sell it for R3.50 a week later. Some penny stock analysts reckon that penny stocks can rise even more dramatically within two weeks, and that investors had locked in gains of 136%, 400% and 425%.
- The mathematics of a comparison between penny stocks and the rest tell an interesting story: if a penny stock rises with say 20 cent, from 3 cent to 23 cent a share, the gain which has been made is 666%. That means an investment of $1000 in this penny stock, will skyrocket to $7666. Now look at this: A rise of 20 cent in the price of a blue chip stock, will turn a $1000 to only $1000.57. Your profit? A measly 57 cent.
- One should add that such extraordinary successes are often achieved with the assistance of an expert, using investment tools such as computer programs.
- The benefit of penny stocks is that you can also make extraordinary profits over the longer term as well. Many giants of today (Microsoft and Xerox to mention only two) had started as penny stocks.
On the other hand, many analysts and stock investors believe that investing in penny stocks is unwise, because the risks are too high. Certainly this opinion is valid – penny stocks are riskier than other more expensive stocks that were issued by large. r and more established businesses than the smaller businesses representing penny stocks. Besides, penny stocks are more volatile than other stocks. One analyst believes that almost 98% of penny stocks are junk, but the other 2% can be the superstars of tomorrow.
Fact of the matter is that all penny stocks are not necessarily risky, since the companies that issued them, are not necessarily bad, unprofitable companies. The important requirement for evaluating a penny stock is that the business should be studied. It should be analyzed similar to large cap companies. Basically the same criteria should be applied.
There are a number of reasons why investments in penny stocks can produce excellent results. An important point in favor of the acquisition of penny stocks, is that money can be made from penny stocks even if the general economic conditions are unfavorable. Statistics have shown that small-cap stocks have outperformed the overall market over the past four decades. Since April 2000 the value of the S & P 600, the index that tracks small cap (penny stock) companies, have gone up by 117%.
Nathan Gold in his website pennystockegghead refers to a Merrill Lynch study that indicates that in the 18 bear markets (where stocks are down on a wide front for a considerable time) since the 1930s, small-cap stocks (mostly penny stocks) had gained an average of 41.4% within 12 months after the market decline had started. Substantiating this point, Gold (the “Penny Stock Egghead”), mentions 10 giant companies that were established during adverse economic conditions: recessions, depressions or fuel crises. They are Microsoft, Proctor and Gamble, IBM, GE, Hyett Hotels, IHOP, Burger King, Fed-Ex, Hewlett-Packard, Revlon Cosmetics. You can imagine what their stock prices were at the time when they were listed, and what they are today.
Thus, adverse economic conditions during which stock prices fall, often offer good buying opportunities. Often when the stock market’s big indexes are struggling, investors turn to the small/micro cap sector, where you find the penny stocks. Penny stocks are not so closely linked to general market movements. When the big investors begin to spend big money in the small cap sector, this signifies greater liquidity, which in turn brings bigger gains for the penny stock traders.
Also, as a result of the decline in stock prices, many excellent stocks become undervalued, which means that buyers have the opportunity to acquire those stocks at a considerable discount. Quite often, penny stocks with huge potential can be picked up at ridiculous prices. You should always be on the lookout for such bargains.
Hopefully A Basic Guide to Penny Stocks has provided you with a good idea of the pro’s and con’s of investing in penny stocks. The following web pages will deal with important information about the best methods to use when selecting stocks to buy and where to find those stocks.
