January 19, 2013
Penny Stock Companies and Blue Chip Giants
As you review the following differences between “blue-chip” equities and penny stocks, you may be able to see why professional analysts and institutional investors usually shy away from these speculative shares.
The kind of money that the big players use could crack the backs of many of these penny stock companies. There would not be enough volume on the other side of their trades to enable the transaction, because some penny stocks often trade only a few thousand dollars worth per day.
The negative connotation towards penny stocks among financial industry insiders needs to be kept in context. Sure, these investments are often low-volume, inexpensive shares of unproven companies. However, that is the beauty of penny stocks, and is partly why you can acquire such potentially rewarding stocks at such bargain prices.
As well, the lack of institutional interest is one of the keys to our methodology of picking the best penny stocks.
Getting involved early, then holding on as the company gets discovered and explodes in price, is partly dependent upon the previously unknown company suddenly gaining interest from bigger players.
Penny Stock Speculation
Speculation is based on penny stock companies having lower available information about their operations,minimal revenues, unproven management, and often an unproven product or industry.
A big-name company like General Electric or Ford Motors will have very little speculative value. In other words, you will probably not make hundreds of percentage points on your shares, but instead would be happy with returns of 10% to 20% per year.
In some cases, traders even use large-cap stocks to hedge or protect their portfolios, out-perform the market, preserve their capital, or diversify their exposure.
On the other hand, trading penny stocks with hopes of selling when you have realized a 20% gain might be folly. Penny stocks make their gains by the hundreds of percentages, and thousands, not by the tens.
There are many bad investments in the penny stock field, so the best way to succeed is by isolating those with superior speculative value. The chance of buying into shares of the company that could multiply 10 or 20 or 50 times in price is the whole idea of speculation.