Penny stock

If there’s a Wild West in the investing world, it would have to be “penny stocks”. These corporations get their name because their share prices are usually in the pennies (ie, less than a dollar) and are often less than one cent! For example, a penny stock may have a price of $.0033, representing a third of a cent.

What often makes a corporation a penny stock is the founders’ decision to “go public” (ie, sell shares to the broad investment community) before the company has a proven product or service. Investors who buy its shares at this point are taking a big chance because they’re buying into ideas (some would say dreams) that may or may not pan out.

For example, a company may claim that it is developing a part that, when installed in a car, doubles its gas mileage. The corporation says that it needs $1 million to finish the product, so it sells 10 million shares at $.10 each. If the company can actually complete this product, you can make a tremendous amount of money. If it doesn’t, your entire investment will probably be lost. These companies need every penny (no pun intended) people invest in them, so they do not pay dividends. In fact, they may never have made a profit.

There are other concerns with penny stocks:

  • The stock price can swing wildly, doubling or losing half its value in a single day.
  • It is often difficult to research them. If you bring up the symbol of a penny stock on a popular financial web site, many of the usual links will be dim because they are not available.
  • Shares of these tiny corporations do not change hands between buyers and sellers all day long as with larger corporations. If you want to buy shares, you may have to pay a stubborn seller a high price to get his or her shares. If you want to sell, you may find little interest among buyers and have to drop the price you are willing to accept to motivate a buyer to step up and take them. The ability to sell quickly without having to drop the price significantly is called liquidity, and penny stocks lack it!
Suitable for People who prefer gambling over investing.
Examples Cardinal Resources (CDNL), DC Brands International (HRDND), HW Holdings (HHWW).
In the news FINRA Fines Aegis Capital Corp. $950,000 for Sales of Unregistered Penny Stocks and AML Violations – August 3, 2015

SEC suspends trading in 255 dormant shell companies – February 2, 2014

The latest guilty pleas in Spongetech case – October 24, 2011

Connections Penny corporations are the opposite of blue chip corporations.
Explorations You can find many web site which focus solely on penny stocks by doing an internet search on “penny stocks”. Visit these sites and make a list of any ten penny stocks. Then:

  1. Write down the total market value (aka “market cap”) of each. Some penny stocks are incredibly tiny, with a market value in the tens of thousands. Others can be surprising large, having market values in excess of $100 million!
  2. Click a one-day chart of each of these stocks. Note the total amount of time on the chart that the price was horizontal. This is the period of time that no shares traded hands between buyers and sellers. The longer the time, the harder it will be to sell your shares at a good price if you wish to sell them.
  3. Subtract the lowest price a share traded for during the day from the highest price. Divide the difference by the last price at which shares traded hands. Multiply your answer by 100 to determine the percentage the stock moved on this day. How does this compare to the overall stock market, where a move of 2% is considered significant?
A final word Investing is difficult enough without resorting to putting one’s money in penny stocks.