All You Need to Know about Penny Stocks!

1. What Are Penny Stocks?
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In the Philippines, penny stocks are Small Capital Stocks. If your stockbroker is Citiseconline and upon seeing their latest research you noticed an announcement titled Small Cap Guide, those are the penny stocks in the Philippines.

2. Volatilily
Most of the penny stocks in the Philippines are being traded at less than 1 peso. As an actual example, take a look at the snapshot above taken from Citiseconline's latest research; most of the stocks in the research are less than 1 peso. The share price of penny stocks can easily be manipulated. In the US, faulty or misleading information is provided through internet, resulting in investors buying shares in the underlying company. When buyers flocked, the price goes up. On the other hand, the original individual or organization who owns the shares of the Company upon seeing the increase in price sells their holdings, thus earning a hefty sum of money. 


3. Scammers are in picture
Internet has made penny stock scams easier to perpetuate. Actually I received 2 to 3 offers from Investopedia regarding these penny stocks luring me to buy their companies. Obviously it's a scam and whenever I received it, I delete it immediately not even bothering to read. These penny stocks will often post gains during the promotion. This leads many investors to believe the positive statements in the promotion advertisements to be true and verified because the share price is appreciating.

4. Low Liquidity
Penny stock companies often have low liquidity, making it difficult to sell shares. If big companies who normally finance their expansions through bonds, IPO, loans, etc are sometimes having difficulty getting the funds they needed, how much more with penny stocks. If the grocery in your neighborhood earns 1 million pesos every year and is having difficulty finding funds to expands its operations, how much more for a sari sari store who earns 10,000 pesos every year to finance its expansion. Banks always look for the liquidity of the borrower and in the case of the sari sari store, perhaps it needs to the mortgage the entire sari sari store as well as a couple of properties to get funds from the bank.

5. Hard to Sell
Penny stocks also are very hard to sell. Since most of the foreign investors and big boys in Philippines who owns perhaps 90% of the countrys resources trade often with blue chip companies, penny stocks in the Philippines have very little funds allocated to them. In extreme cases, investors may encounter difficulty liquidating their positions when they want to sell it because nobody in the stock market wants to buy the shares.

6. Lack of Information Available to the Public
The key to any successful investment strategy is acquiring enough information to make sound decisions. Information for Small cap stocks is not readily available. If you will take a look on Citiseconlines research, most of the updates are for the blue-chip companies. Same way with newspapers, they publish articles and news about the big companies. 

7. Penny Stocks Fallacy
Some people think that today's stocks were once penny stocks. Investors who have fallen into the trap of the first fallacy believe Ayala, Metrobank, SCC and many other large companies were once penny stocks that have appreciated to high peso values. Also, many investors are attracted to penny stocks because of the notion that there is more room for appreciation and more opportunity to own more stock. If a stock is at 1 peso and rises by 50 centavos , you will have made a 50% return. This, together with the with the fact that a 1,000 pesos investment can buy 1,000 shares, convinces investors that micro cap stock are a rapid, surefire way to increase profits. Unfortunately, people tend to see only the upside of penny stocks, while forgetting about the downside. A 1 peso stock can just as easily go down by 50 centavos and lose half its value. Most often, these stocks do not succeed, and there is a high probability that you will lose your entire investment.

8. Conclusion
Some penny stocks might be good quality, and many of them are working extremely hard to make their way up to to be a big company. However, the flip-side is that there are many good opportunities in stocks that aren't trading for pennies. Penny stocks aren't a lost cause, but they are very high-risk investments that aren't suitable for all investors. If you can't resist the lure of micro caps, make sure you do extensive research and understand what you are getting into.