Penny Stock

From 1979 to 1981, I attended Graduate School in North Carolina for Business and remember that one of my fellow students paid for his entire education by buying and selling “Penny Stock.”

So, what is Penny Stock?

According to Investopedia, A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets.   

Market capitalization, often called “market cap,” refers to a simple calculation.  To calculate this number, you multiply the total number of shares a company has outstanding (the numbers of shares issued and owned by investors) by the current share price company's market cap, or size, which is often in the hundreds of millions and sometimes billions.   

So, are we clear???

Returning to Investopedia…  so, why is it important?  A common misconception is that the higher the stock price, the larger the company. Stock price, however, may misrepresent a company's actual worth. If we look at two fairly large companies, IBM (NYSE:IBM) and Microsoft (Nasdaq:MSFT), we see that at as of March 18, 2009 stock prices were $91.75 and $16.75 respectively. Although IBM's stock price is higher, it has about 1.34 billion shares outstanding, while MSFT has 8.89 billion. As a result of this difference, we can see that MSFT's market cap of $148.91 billion is actually larger than IBM's $122.95 billion. If we compared the two companies by solely looking at their stock prices, we would not be comparing their true values, which are affected by the number of outstanding shares each company has.  Read more  

Today, penny stocks are offering smaller investors a great opportunity to earn significant up-side on their investments, with relatively little risk.

This is occurring for two reasons:

1.      It doesn’t take a lot of money to invest in penny stocks. For the price of just one share in large companies such as Apple or Google, you could buy thousands of shares in most penny stock companies.

2.      Penny stocks have the potential for huge returns.  Because the price per share is so low, they can experience huge price increases – sometimes even doubling or tripling in just one day.  Price jumps like this are simply unheard of in larger companies, but much more common with penny stocks.

Let me close by reiterating a comment or two that I have made in previous posts.

First, the average, annual rate of return for mutual funds over the last 60 years or so (providing you keep your funds in the accounts for 20 years) has been anywhere from 10-12%, which means your money has an opportunity of coming close to doubling every 6-7 years.

Second, if you were to invest $2.50/day into a mutual fund, after 40 years, you would have $500,000 or more in that account because of my first point above.

So, if you are in your 20’s or 30’s you have an outstanding opportunity to invest in your own future either via penny stock or mutual funds, in addition to what you might receive from Social Security and/or your company’s pension fund.

Why is this so IMPORTANT?

Regardless of who wins the election tomorrow, America has joined the rest of the world and is competing in a global marketplace.   Companies are hiring inexpensive workers who can produce.  Colleges and Universities are “flunking out” those students who are academically unprepared to be there.  What is left for many Americans is low wage employment and a movement of relocation to the south where it is cheaper to live.

But, even low wage earners can become financially independent in their twilight years if they decide to start saving early.

Take it from someone who “burned their candle at both ends,” and who has now come to a milestone awareness that I should have listened to my father’s advice.