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Blog : Sage Advice for Lowly Penny Stock Investors
by John Whitefoot on June 22nd, 2007
For better or worse, I met someone the other day that actively trades stocks. We started talking about the markets in general, the Dow Jones Industrial average, and what the future holds – will the bull rage on, or will the bear come out of hibernation?
I noted that with small cap stocks, or more specifically, penny stocks, it didn’t really matter what kind of market we were in. Penny stocks don’t really follow the same trajectory as mid-cap and large-cap stocks.
Sure the markets general optimism will trickle down to penny stock investors, but when push comes to shove, a penny stock’s share price isn’t going to react the same way a large cap stock does when Ben Bernanke, Chairman of the Federal Reserve, coughs.
My new found friend was not impressed; and my opinion on the markets was sorely tarnished in his view. Why? For starters, penny stocks are a flash in the pan where you can lose your shirt. What’s further, with penny stocks there’s very little liquidity, and it’s tough to do research.
Yes, liquidity can be a problem with some penny stocks, and it can indeed be difficult to do research. And yes…like any stock you can lose your shirt. But that’s why it’s even more important to exhaustively assess what you’re buying first I argued.
Taking great tact, I asked him what he looks for, or doesn’t look for in mid and large cap stocks. Holding the secrets of investing closely to his chest, he told me to never trust rumors and if it’s too good to be true, it probably is. Intrigued, I begged him to continue.
Don’t buy your stocks on a whim…always research...and for heavens sake, don’t fall in love with your stock; learn to accept loss and move on. And finally, don’t fret over selling too soon.
I remarked that his sage advice was good.
As a penny stock investor, it's paramount that you do your research. And after you’ve done your research, do some more. Whether it’s through technical analysis or reading the company’s quarterly results and press releases; research is the yellow brick road to a penny stocks worth.
Interestingly, I pointed out that the criteria he uses to uncover large caps stocks is the same one penny stock investors use.
Except for one thing, investing in penny stocks and small cap stocks hardly means settling for small returns. Many seasoned investors overlook penny stocks in favor of their mid and large cap peers – those with a market cap over $1 billion.
Unfortunately, large cap stocks don’t give you large returns. What they may give you is a 7% annual return and long-term security. For a penny stock investor, a 7% return is worth a yawn. And long-term security isn’t a going concern for penny stock investors either; short-to-medium term gains are.
So, in the end, I advised my new chum, that our investing styles are virtually identical. In parting, I told him the main difference between his large cap stocks and my lowly penny stocks...was that I liked double and triple digit growth.