The terms penny stocks and micro cap stocks are often interchangeable, normally referring to stocks that trade for less than $10 a share from companies with market valuations less than $250 million. In many cases, these stocks trade for – quite literally – pennies on the dollar, hence their description as penny stocks.
And while you may have heard horror stories about them, penny stocks can be profit generators, as long as you do your research and know what you are getting into. That being said, what are some of the characteristics that can make penny stocks a worthwhile investment, and lead you to making money in the stock market?
- The best penny or micro cap stocks differentiate themselves from others by offering something the competition does not, from a product or service to giving people a way to communicate and make decisions faster and better. They are innovative and forward thinking.
- They have strong, experienced leadership in place. While many penny stocks do indeed trade for less than $1 a share, that does not mean they do not have knowledgeable and experienced leaders. The advice here is to see which companies have industry or product veterans making key decisions – in terms of development, marketing, and finance.
- Huge growth potential. Every successful business has to start somewhere, and many begin in the micro cap world. Keep in mind that the likes of Walmart, Microsoft, and McDonalds were small once, and the wise investor who recognized a terrific ground floor opportunity reaped the profits later. And because companies whose stock is of the penny variety are small, it takes less for them to double in value – generating potentially huge profits for early investors – than for a company already worth a billion dollars.
- Mutual Funds will not invest in them, mostly because a penny stock does not have market value to justify the investment, leaving great opportunity for individual investors to swoop in and establish footing at ground level.
- Market focus can result in explosive growth. A key characteristic of penny stocks is the company in question often has a singular focus, meaning they do one thing right every time, whether it is product development or service delivery – and pay attention to their customer’s needs.
- The best penny or micro cap stocks – regardless of their individual price or market value – also offer transparency and information at all levels. Like much larger companies, they will offer access to earnings reports, data on product development, and other information you need to make the right investment choice.
- Less risk on a per share level. If you are a first time investor, do you really want to invest several thousand dollars in one or two shares of Berkshire Hathaway, for instance, or invest a few hundred dollars in several thousand shares of penny stock?
There are many reasons why penny stocks are an attractive investment vehicle, but the key is research and being comfortable with what you buy. We can provide you with our penny stock picks by simply signing up for our newsletter.