Penny Stocks

Many investors have argued about exactly how “penny stocks” are defined in terms of capitalization and price. There are a lot of websites that may have varying definitions - but many a penny stocks list will contradict each other when providing data about these stocks.

Here at “1000 Penny Stocks” we use the terms “penny stocks” and small-cap” stocks as if they were the same thing. But if you want to get technical about it, small-cap stocks are called that because they are based on their market capitalization while penny stocks are usually looked at in terms of their price.

Some investors claim that penny stocks are simply stocks trading for “pennies” a share, while others say penny stocks are anything under $5 or $10 a share. In some cases, even if a specific stock qualifies the price-per-share criteria, many investors won’t consider it a penny stock unless its total market capitalization (i.e., the total market value of the company) is under $1-1.5 billion.

The amazing thing is that more than three-quarters of the stocks on Wall Street fall under the $1.5 billion dollar market capitalization that qualifies it as a penny stock. Many of these stocks are at values a lot less than this level of market cap.

Now in case you’re confused about how to buy penny stocks until you know exactly what can be called a penny stock - the Securities & Exchange Commission states that any stock under $5 is a penny stock. I hope that clears up any confusion you might have had about penny stocks.

Now while these definitions might vary slightly between individual stock traders - some set the cut-off point at $3, while others only call those stocks trading at less than $1 to be considered a penny stock - we know you get the point. There is no exact definition of what a penny stock is - only a loose set of guidelines to help you choose penny stocks over large-cap stocks on the NYSE.

We generally set the cut-off point at around $5 per share, and we also consider any stock that is trading on the Pink Sheets or the Over the Counter Bulletin Board (OTCBB) to be a penny stock as well. So now that we all know what penny stocks are, let’s take a look at why you might want to invest in penny stocks instead of other mainstream investment options.

Why Investing In Penny Stocks Makes Sense

There are a lot of reasons to consider small-cap penny stocks as an investment option above and beyond the 4 reasons I will mention below. However, we think these four reasons are pretty good ones just the same. Now penny stocks are not for everyone, that’s true, but these four simple reasons may be just what you need to get started in the small-cap market.

Why Penny Stocks Reason #1

Penny stocks do note get anywhere near the press coverage or media action that the major players on the Nasdaq and NYSE get by the mainstream media. That can give you a great advantage when it comes to getting better investment returns. Not a lot of investors play in the small-cap markets because they are not conditioned to by the financial press.

Another factor is that major brokerage firms and institutions usually don’t have the interest or manpower to cover penny stocks. While a big company like Microsoft, Google, or GE might have 40-50 analysts from the various investment firms covering every move they make, small-cap penny stocks usually only have one analyst - or even none at all covering them.

Now here’s another interesting point, even if these major investment firms did cover penny stocks, and did end up finding a winner - they still couldn’t invest. Why? Because there simply wouldn’t be enough shares to buy for the kind of money they have to invest. They make major purchases when they buy stocks, and if they traded in small-cap companies they’d end up buying the whole company. That’s why they tend to stay in the large-cap markets.

This means that an individual investors stands a great chance of finding under-values penny stocks in the small-cap market. These stocks are often trading for next to nothing per share simply because they ignored by the big financial institutions.

Why Penny Stocks Reason #2

Despite the fact that large-cap stocks are covered everyday by the mainstream press, from an investors point of view, they just don’t provide the returns needed to build wealth. You see, it’s extremely difficult to grow your investments 30% to 50% from blue-chips. Big returns - the kind that can make your financial goals a reality sooner rather than later - simply cannot be made investing in the well-known large-cap stocks that have slower growth rates.

Now, I know there’s no problem owning large-cap stocks like Wal-Mart, Intel, Home Depot and all the other household names on the NYSE. They are great companies with solid earnings and a bright future. They sure aren’t going to go bankrupt any time soon. They can prove to be great investments because they are a great base for any stock portfolio.

But only focusing on these big companies can really blind you to the opportunities that exist in small-cap penny stocks. You just aren’t going to see the kind of gains in the blue-chips like you’ll see when you start looking at penny stocks. The math is pretty simple really.

It’s a whole lot easier for a $50 million company to double in size and revenue in a much shorter space of time than it is for expensive $15 billion companies to do the same. And while it’s true that the best way to build wealth is by investing in a mix of different stocks and asset classes - including large-cap blue chips - penny stocks that are trading at affordable prices and that have good solid fundamentals can provide a real boost to your investment returns.

Why Penny Stocks Reason #3

Even though you would never know it from watching CNBC or Bloomberg, penny stocks can provide the opportunity to generate double and even triple digit gains all year round. The reason for this exactly due to a reality I mention earlier. Almost 75% of Wall Street’s stocks are small-capitalization companies or penny stocks - meaning their total shares or market cap is less that $1.5 billion on the stock market.

Now ask most investors - and many financial advisors and planners - about penny stocks and you will get a wide variety of reactions, and sadly most of them will be negative. But you know what - that’s actually a good thing.

Because if everyone knew how lucrative and low-risk penny stock investing done the right way can be, there’d be no advantage to it. Millions of individual investors would pile in, and the prices would shoot up — and then all of a sudden, penny stocks would be lucky to yield the same 8–12% that the index’s are averaging.

Why Penny Stocks Reason #4

Investing in penny stocks can give you more freedom when choosing which stocks to buy. If you only select stocks from a list of the big companies found on the NYSE - you are limiting yourself to only a handful of opportunities to buy at the right price.

When you add penny stocks to your investment portfolio, you can stop woorying so much about what the WSJ thinks the market is going to do tomorrow. You can stop watching the financial news every night concerned about who’s eating into the profits of Microsoft or GE today. When you start investing in penny stocks, you can start spending more time working on your golf swing.

The main reason for this is because as a smart penny stocks investor, you’re not as much at the mercy of a “bull” or “bear” market. Good, sound small-cap penny stocks can go up in value regardless of what’s happening in the markets overall. They’re simply not as effected by the large swinging moves that can happen when large financial institutions buy and sell their shares. They’re not even on the radar of these investment firms. And that’s good for you.

It’s no secret that the real key to big profits in the stock market is to invest in stocks trading at a huge discount to their real worth. And there’s really no better way to do that than to invest in little-known small-cap penny stocks.

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