Being rich with penny stocks

Penny stocks are very attractive investment opportunities. Many people have become very wealthy with a huge concentration of income in a single company that they expected to see growing over the years. Investing in those types of securities is very complicated for a non-initiated investor because of many cases of fraud, risk aversion or industry collapse. But for people who are willing to make advanced searching and dig a little deeper than the average person, penny stocks can actually make you some money. Reduction of financial portfolio risk is not only applied by diversification of the nature and amount of securities but also by acquiring more knowledge about the company, its industry, products, clients and strategy. Especially in our ultra-informed society. 

A penny stock is primarily characterized as a security whose price is less than 5$ per share (SEC, 2006). They are usually quoted over-the-counter but the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Securities Dealers Automated Quotation (NASDAQ) have a large portion of penny stocks. Companies having this type of stock are usually small and highly speculative since they don’t have any historical record to back up anyone’s investment (Andrew Black, 2016). But it appears very frequently in the markets that penny stocks are not only small size companies. Amazon, Crown Holdings, Starbucks or Monster Beverage are examples of stocks priced at less than 5$ while having billions in annual sales written on the first line of their income statements. Apple was a Penny Stock from 1980 until 2005, so during more than 25 years! If you had invested 50 000 euros just 22 years after Apple entered the stock market, you would have more than 5 200 000 euros today in your bank account. After 2007, we saw companies like Ford, CBS and Bank of America (the second financial institution of the US at that time) being priced at less than 5$.

Many of us think that we can’t compete against the Market. The reasons for scaring us are quiet fair: better tools, more time for researching, a lot of professional analysts and engineers and huge amounts of money to be invested. It supports the theory of the efficient market that suggests that prices written on the markets are reflecting the real value of any given asset meaning then that we can’t beat the market. The reality is different. Of course, most of the stocks priced on the market are being fairly valued, and obviously, there are very smart people out there, but mispricing is very common. And it has more to do with our emotions, misinterpretation or myopia than any other quantitative model built by mathematicians. 

Traditional stock investment focuses on stocks priced at more than 5US dollar. They are being considered as more mature and safe companies since the high price would unconsciously suggest high quality. The most frequently used criterion for investing in one company is the quality of the latter and the risk associated with the investment. However, it is not always true. The market is well known for gathering many sheep that follow the crowd and some wolfs that lead the masses. It underlines the problem of self-decision of investors, especially when we deal with penny stocks. The usually developed variables that explain the variations of penny stocks – liquidity, firm size or price to book - are not sufficient when we look at the penny stocks that trade on national exchange. 

Non-professional investors do not have to worry about investing in penny stocks. With a serious analysis and hard work, they can find some great companies. Obviously, blue-chip stocks like IBM or Amazon are big companies, and thus may sound less riskier, but small companies can sometimes hide high quality penny stocks. Even better, sometimes we find big companies striving in a sector that experiences some difficulties: it is now the case in the retail industry for example. Time to buy some stocks?