Penny stocks can be the bane of your existence or can really make you a tidy profit. But how do these wild swings even happen? How is this share value reached? Who is to say what any stock is valued at all? How can a stocks share price; in a single day and on no real “news” whatsoever; have their value fall so quickly? One stock’s opening trading price could be somewhere in the vicinity of $.10 and then at the end of the day plummet to $.001. And then the following day recover to a more realistic share price. Manipulation is obviously present in penny stocks; they’re a tough racket to break into. The resulting value of your penny stocks may have a lot more to do with hype and speculation rather than any real valuation.
HOW IS STOCK VALUATION REACHED:
As you may already know the valuation formulas in investing boil down to two different schools of thought; absolute and relative. That’s fine for NASDAQ and NYSE stocks; they run on their own parallel course. Valuation is earned. These stocks are heavily regulated, monitored, and have reports filed on their behalf. These companies’ products are in traders hands, on trader’s bodies, and in trader’s homes. They are the cars we drive, the vacations we take, the keyboards we’re typing on; stocks which have valuations afforded them are deserving of these valuations.
Penny stocks (or micro-cap stocks) are not traded on the major indexes. This fact leaves them with a lot less oversight and a lot less requirements. Penny stocks don’t have to file quarterly earnings reports and they don’t have requirements in order to maintain their position on the OTC (Over The Counter) exchange.
PENNY STOCK QUANDARY
But wait a second. You were on that really reputable message board and so-and-so said that this particular penny stock was going to shoot through the roof. And it might. It might go from $.003 to $.30. It might continue up to $3.00. But that’s not very likely. The stocks value may also have reached its apex and begin the long, slow descent into irrelevance. See we don’t know. We don’t know anything about a penny stock’s earnings, we don’t know the company’s production capacity, and we don’t even know if the company is in business anymore.
That’s the real quandary with investing in penny stocks. You want to believe the hype, you want to think that people aren’t lying to you, you want to believe that this company you have trusted is real; but because there’s no track record, you just don’t know.
PENNY STOCK SOLUTION
There are several good ways to save the pain of penny stock sticker shock. One way is to monitor their progress before you invest any money. Figure the trading range and see if you can’t scrounge news about this company from some reputable sources.
Also look for this stocks products. Can you find places where this company is selling/selling-out of their product? It may be internationally; it may be in bigger cities. Call around to stores which are purported to carry this merchandise and ask! Are they selling this product? How is it selling? What are customer’s reactions? There is plenty of legwork which individuals can do which can only help you make your buying decisions.
There are a lot of great companies out there who are doing honorable work and are working really hard to become the next great name. Then there are others. Even though the “rotten apple” theory is a little juvenile, it still remains the truth.
Before you go throwing money at the OTC boards; trying to see what sticks; do yourself a favor and do your research on penny stocks to come to your own absolute valuation. You may be holding a stock and it could be trading at $.02 so you think ‘well it can’t go any lower!’ Of course you would be wrong. You don’t know the feeling until it happens when 10,000 shares of that same $.02 stock worth $200 are now worth less than $1 because you invested in bogus paper.
That is when you wish you could go back and make smarter choices. Do everything you can to figure a penny stocks valuation before you invest any money of your own.
Sources:
http://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuation-methods.asp#axzz1j7ZtAcmM
http://www.investopedia.com/articles/03/050803.asp#axzz1j7ZtAcmM
Many Years of Personal Investment Pain