Few investments in the stock market carry a higher level of danger than penny stocks. The prices of these equities, which trade for less than $5 per share, are often set at that level for a compelling reason. A once-thriving firm that is now on the verge of bankruptcy or has been forced to de-list from the major exchanges and is now trading over-the-counter may, for instance, be the owner of a penny stock that is now trading over-the-counter (OTC). It's also possible that the firm is brand new, in which case it has a limited market history and has not yet satisfied the requirements necessary to be listed on a major exchange.
Make Sure You Have the Basics
Before taking a risk on any penny stock, investors should do extensive research and due diligence on the company. For instance, investing in the financially troubled Walter Energy Company would have seemed to be a solid option. After all, a share of Walter Energy reached a high of $143.76 in trading in the year 2011. However, investors who acquired Walter Energy stock when it dropped to $0.16 would have still lost money since the business filed for bankruptcy not long after. 2 On the other hand, purchasing Inovio Inc. (INO) stock when it was selling for less than one dollar in 2008 provided investors with many chances to sell their shares for more than ten dollars in 2009, 2013, through 2020.
Fundamentals of the Companies
The fundamentals of the companies behind these two stocks couldn't be more different from one another. The metallurgical coal industry was getting on in years and was becoming vulnerable to cyclical demand and political influences. Walter was an established firm in the industry. When global leaders announced promises to reduce greenhouse Signs emissions, this put further downward pressure on Walter Energy, which was already suffering from a worldwide coal supply glut and weakening demand from China. This added pressure caused Walter Energy's stock price to fall even more. In the end, Walter successfully sold its assets to two separate businesses in 2016.
In contrast, Inovio is a speculative biotechnology play with strong relationships in its developed cancer vaccine portfolio, which provides a high potential for buyouts. As of 2020, a takeover has not been completed, but the stock price continues to drop, followed by large gains that go almost as fast as they were achieved. Therefore, while examining penny stocks, you should carefully compare any possible profits against the fundamental elements that underlie the firm. These basic variables include the company's debt, cash flow, acquisition possibility, and Porter's Five Forces of Competition. Before you even consider purchasing the stock, you need to understand the factors that led to the price reaching its present level.
Analysis of the Life Cycle of an Industry
A trader in penny stocks should aim to undertake an industry life-cycle study and evaluate the financial sheet of a firm they are interested in. Some organizations trading in penny stocks worth belong to an industry still considered to be in the "pioneering phase." This early phase is distinguished by a large number of rivals of a relatively modest scale in the market area, the introduction of innovative items and ideas, and a relatively low level of demand from customers for the products. Because this period is characterized by a large number of start-up companies (particularly in the technology or biotechnology industries), all of which have high costs and little to no sales to date, the majority of these companies will trade at very low prices due to the speculative nature of their products.
Industry Reliant On Penny Stocks
It should come as no surprise that markets that provide just two possible outcomes for most of their firms will have an abundance of penny stocks. The biotechnology and resource industries are the most common places to find binary outcomes, sometimes known as "make or break" speculative bets. During the commodities boom of the 2000s, the Canadian TSX Venture Exchange was home to many resource-based penny stocks that saw significant price appreciation. After that, the festivities ended, and the majority of the stocks collapsed back down to zero, much as many technology firms did in the crisis of 2000.
Sound Management
"Location, "location, location, location" is the most important factor when it comes to real estate. It's all about management, management, and more management regarding penny stocks. A floundering company may be turned around by competent management, and a new business can reach new heights with the same. Even more crucially, knowledgeable, ethical management and a genuine interest in the firm via share ownership may give investors confidence in the company they are investing in.
