The Fake News On Penny Stocks

For the most part, the talking heads on television treat penny stocks like that one friend you have that could never get their shit together. They’re still around… but don’t really want to talk about them, like they are some outcast or something.

But do you what we call that nowadays?

Fake News.

Now, before I get into it, let’s first define what a penny stock is, so we’re on the same page.

The U.S. Securities & Exchange Commission defines penny stocks as a security issued by a very small company that trades at less than $5 per share. They even go on to say that penny stocks should be prepared for the possibility that they may lose their whole investment.

Of course, most investments that have the potential for high returns are never riskless. And the fact that you’re told, up front, that penny stocks can be speculative is a good thing. You should only be trading with money you can afford to lose. Heck, even MF Global, Lehman Brothers, and Enron were once considered “good” investments… and we know how they ended up.

Don’t let fake news tell you that penny stocks are riskier than other types of stock trading.

Always keep your guard up and do your own due diligence.

Penny stocks can be traded on securities exchanges like the Nasdaq and NYSE. In addition, they can be traded Over-The-Counter (OTC). The big difference between companies that are listed OTC and the larger securities exchanges really boils down to money.

You see, in order to be listed on the NYSE and Nasdaq, a company needs to meet certain financial thresholds. In addition, there is also the rigorous accounting procedures and legal expenses that must be upheld.

For some growth companies, meeting all these requirements is simply too expensive for them, and therefore opt to list on the OTC. However, the OTC market is nothing to sneeze at. You see, there are over 9,500 U.S. and global securities that trade on the OTC market. In addition, the annual dollar volume is approximately $193 Bn, with over 100 broker-dealers making markets.

Clearly, that’s not chump change.

However, fake news will tell you that only crappy companies are low priced penny stocks. As the old saying goes… we all have to start somewhere.

PIR

 

Pier 1 Imports, Inc. (PIR) could have been bought for less than a quarter a share back in 2009.

MNST

Monster Beverage Corporation (MNST) in the late 1990s was trading under a buck per share. In 2015, industry giant, Coca-Cola took a significant stake in Monster, and continued to boost its holding in 2016.

Bloomberg

Source: Bloomberg

I could go on, but I think you get the point. One might counter and say that these are exceptions not the rule. Indeed. These type of moves are extraordinary. However, these type of opportunities do exist with penny stocks. Dismissing a company because it’s shares a trading below a certain dollar amount is just plain silly.

But the Fake News doesn’t stop there. They’ll go as far as to tell you that these companies are so bad that they don’t even offer dividends.

A quick scan on finviz and you’ll quickly see that is simply not true. In fact, here is a list of some microcaps priced under $5 per share that offer a dividend.

dividend

dividend 2

On April 10, 2017, there were 75 companies that were already up over 100% year to date.

And you know what?

60% of those names were “penny stocks.”

You see, fake news will tell you that penny stocks are risky and not suitable for most people. Well, we are not financial advisors here, so we can not tell you what is suitable and what is not. However, without risk, rewards are generally small.

A quick look at these penny stock charts, and you can see that reward justified the risk.

CBAY

Source: Finviz

SXE

Source: Finviz

Again, this is just a small sample of stocks, which don’t necessarily reflect all penny stocks. However, that is besides the point. All stocks, to some degree, have their own inherent risk.

Heck, even accredited investors and large hedge funds AKA “smart money,” are vulnerable to “risk.”

VRX

Source: Finviz

Bloomberg

Source: Bloomberg

We’re all adults here. If you’re trying to beat the bank and inflation, you’ll have to take on some risk. Penny stocks are more volatile than the Dow 30. However, it’s very rare to see the type of returns you see in penny stocks than it is in the Dow 30 and S&P 500.

Relatively speaking, it’s a lot easier for a company with a small market cap and low float to double its stock price… than it is for a well established company like Exxon Mobil.

So What Is The Real News About Penny Stocks

 Instead of saying penny stocks are risky, let’s call them volatile, because that is a much more accurate description. If you’re an active trader, you want to be involved with stocks that move, this allows you the opportunity to get in and out in a short period of time.

Trading penny stocks is like trading any other publicly traded company. Some are good and some suck. We don’t live in a world where everything is black and white, good and bad.

After all, some of the greatest investors of our generation have traded/invested in penny stocks.  Who could forget April 2015, when it was disclosed that legendary investor Carl Icahn increased his stake in Voltari Corp., a penny stock that was in the mobile-advertising space.

Icahn and his funds purchased over 4M shares, which cost him roughly $5.5M and ballooned to over $65.7M  almost overnight.

bloomberg icahn

Source: Bloomberg

 Now, if penny stocks are good enough for one of the world’s greatest investors, why does the fake news media tell you they are so bad?

Well, again, it really only boils down to money. These companies rely on advertising money to get by. In addition, banks have a bias to companies they do business with. That’s why it’s hard for them to downgrade certain companies, they are scared to lose valuable business.  A real dog and pony show to say the least.

Bottom Line

Common sense can take you far in this game. Savvy traders will seek the entire market for opportunities, whether that’s futures, options, or stocks. There is a time and place for everything. With that said, if you’re on the hunt for potential home run trades, don’t be scared to look at

 

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