Penny Stocks: Let’s Grow!
Penny stocks have been a controversial topic throughout the entirety of their existence. With Hollywood-movies like ‘Wolf Of Wall Street’ being the faces of the movement, the media as well as investment proportions have started to shift slowly from large-cap stocks to companies with smaller market caps. A penny stock is defined by the Securities and Exchange Committee as any stock that has a price of under 5 dollars, most of which being small/mid cap companies. In today’s market the definition is tailored more towards stocks that trade at prices that are under a dollar.
Trade-guru Michael Marcus – who Turned 30,000 dollars to 80 million in two decades – goes off of three fundamental aspects for a trade to be considered a good investment. First and foremost being an imbalance of supply and demand. Unlike bigger companies that trade on centralized trading exchanges like NASDAQ, penny stocks typically operate on OTC markets; the most speculative of which being the Pink sheets. Many companies traded on pink sheet exchanges actually have no requirement to report to SEC while maintaining a minimal amount of financial requirements in order to file.
This opens a whole new market for companies who do not have the money to properly file, but have the potential of becoming a large-cap. Studies show that roughly 90% of Pink sheet stocks tend to be illegitimate, that being said it’s wholly on the intelligent investor to determine the growth and potential of these relatively cheap investments. This imbalance in supply and demand of legitimate opportunities, creates an informational gap. An informational gap that will allow you to really arbitrage off of the stocks, but the information and the understanding is again solely a product of the work done by the investor.
The second fundamental Marcus spoke of was proof that the market is moving in the speculative direction you expect. Studies showing investment proportions slowly shifting from large-cap stocks to small-cap stocks combined with the recent world-wide personal/media interest in the ambiguous topic known as penny stocks are the proof of this directional movement.
The last but most definitely not the least, Marcus explained that there must be proof that the market reacts directly to a psychological tone. Most small-cap companies do not have to actively report to the SEC, hindering the ease of movement information about these stocks. Getting the information is the hardest task, But once you know what everyone does not, you will be able to anticipate psychological reactions that completely govern the penny stock market.
An investor’s venture into the penny stock market is solely based on the amount of work you put into the active research you do for each of the companies. Their sub-dollar prices may seem to be discouraging, but it makes it easier for the stocks to move. A ten cent movement may not seem like much, but when it translates to 20 percent it can make a world of difference, especially when looking to raise capital in the short-term.