A straightforward question with no generally accepted answer. Let’s take a closer look.
Myth: Penny Stocks Are Those Stocks Trading Under $5
In the old days, penny stocks were considered those stocks trading under $5, plain and simple. Nowadays there are many stocks that meet that definition that no one would think of as penny stocks. Just to mention a few (as of this writing):
MoneyGram International (NYSE: MGI), Denny’s (Nasdaq: DENN), Level 3 Communications (Nasdaq: LVLT) and Jones Soda (Nasdaq: JSDA).
All trading under $5, in some cases near $1, all of them fairly large companies, some are household names, and all have institutional investors such as pension funds who hold their stock. None of these companies are penny stocks.
Myth: Penny Stocks Are Those Stocks That Trade On The OTCBB or Pink Sheets
Other people think of penny stocks as those stocks that trade on the Over The Counter Bulletin Board (OTCBB), or especially on the Pink Sheets, where companies can trade without having to submit filings to the U.S. Securities and Exchange Commission (SEC). The Pink Sheets, which has now rebranded itself as‚ OTCMarkets, has traditionally been a Wild West, no holds barred arena where nascent companies peddled dreams to aggressive investors. While there are still many such companies on the Pink Sheets, in the last few years Pink Sheets has gone to some lengths to increase the transparency of companies that trade on it. Furthermore, many large, well-known companies have migrated to the Pink Sheets: Volkswagen (Pink Sheets: VLKPF), Nestle (Pink Sheets: NSRGY), Lukoil Oil (Pink Sheets: LUKOY), Deutsche Telekom (Pink Sheets: DTEGY) and Gazprom (Pink Sheets: OGZPY), to name some. A Businessweek article titled ‚A Touch Of Class For The Pink Sheets‚ highlighted the increasing trend of large foreign companies to list on the Pink Sheets: ‚By listing on the Pink Sheets rather than the New York Stock Exchange, foreign companies get access to American investors at less cost and without having to follow most U.S. securities rules (Sept 8, 2010). So these are companies that for various reasons do not want to file with the SEC or do not wish to make their accounting statements public but that no one would consider penny stocks.
So What Are Penny Stocks?
Penny stocks are small companies that usually trade on the OTCBB or Pink Sheets, whose shares are highly speculative, and whose stock prices are almost always under $1. Some even trade even below $0.01, the so-called‚ sub-pennies. Some penny stocks move on to larger exchanges such as the Nasdaq or the AMEX, others chug along happily right where they are. Many penny stocks are volatile, rocketing up hard and fast. It’s not rare to see some penny stocks go up 100%, 500% even 1,000% in one day. When was the last time shares of Microsoft did that? Never. There’s definitely money to be made. Penny stocks can also move down fast so investors need to know the lay of the land, use common sense and preferably test the waters first by doing some practice trading with little or no money. One of the best things about penny stocks is that you don’t need alot of money to start. Because penny stocks are often so cheap, even small investors can take relatively big positions and cash out with significant gains if a stock moves in their favor.
Promoters and Gurus
Because of the potential to make money, a host of penny stock “experts” have emerged who issue buy alerts and ‚hot picks‚ claiming to hold the key to untold riches. But when you look at the fine print of most of these newsletters you find disclaimers that the “experts” have been compensated by the same companies they are promoting; their ‚Äúhot picks‚Äù are not really hot, they‚Äôre bogus. Yet many investors are unaware of this. Many dramatic moves in penny stocks are the result of the promotional activities of these “experts” the so-called pumps. Dumps often follow pumps, thus the “Pump and Dump” and getting blindsided by one is awful. Yet there is money to be made here if you know what you are doing. For example, knowing how much volume a promoter typically brings in, when, why, and for how long, and how consistent were his last efforts, gives anyone a chance of making great profits during certain campaigns. The problem is unless you are in the business of tracking the multitude of promoters and assorted newsletters it‚Äôs difficult to tell the good from the bad. Some generate tremendous attention for a stock. Others zilch. At Damn Good Penny Picks it’s a full time job for three of us to follow more than 300 promotional groups and we feel sorry for the individual investor who’s on his own trying to make a few bucks with penny stocks by following a handful of gurus. Another alternative is to monitor key message boards such as Investors Hub, Yahoo Finance, Raging Bull, Investor Village and the like, as well as dozens of news streams and stock screeners looking for unusual activity or disruptive actions that can lead to a winning penny stock. For example, one of a dozen variables we monitor on our computerized stock screener are stocks that move up suddenly and with unusually high volume over a given day or two but with no news or obvious explanation for the movement. Could insiders in the know be buying stock in anticipation of a big announcement? Maybe. Could a nice merger be in the works? Often times we find tremendous winners this way, but we‚Äôre looking for them day in day out and unless you are similarly equipped as we are, it‚Äôs tough to sift through all the data. Follow us for a while (it’s free) and see what we’re talking about. You can sign up with your email at http://www.damngoodpennypicks.com.
Can You Make Money With Penny Stocks?
Sure you can. We do. Others do as well. As long as you recognize that the iron law of finance is always present “High Risk, High Reward.”
Wishing you well in your endeavors and whichever road you take,
Jeff Mirkin
http://www.damngoodpennypicks.com