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By Pehon | July 20, 2007
When a the market is deep in a bull trend, many people who have never even read about stock investing, never even read the business times start to get interested. they are attracted by the bull that has been happening for months before that. They start to dig out their dusty and probably never used Poems account, and start to trade.
Naturally, equiped with no knowledge, no real cash commitment for investing, they look for the cheapest shares. Its attractive. If the stock pips up just 1 bid, large returns awaits. The penny stock speculator makes a killing on the first try. Easy money. He continues what he is doing as long as the bull continues. Penny stocks get stronger with these people slowly entering the market.
And none of them bought business times. Still.
But does money really grow on the penny stock trees?
Penny stocks are generally more volatile, it can create wealth in a matter of hours, or create suicides in a matter of minutes.
“They cost a penny, for a reason.”
They belong to companies that have no fundamentals. No growth potential. No drive by the management to expand. No respectable financial results to present.
They are not owned by rich institutional investors. They are almost totally owned by penny stock speculators. Institutional investors are important. If a company’s shares are owned 60% by institutional investors, there isn’t much to sell in a bear market. And likewise, there isn’t much to buy. Hence these stocks are less volatile.
“Penny stocks are not owned by institutional investors for a reason”
Penny stocks on the other hand are bought by clueless speculators who just follow the trend, hoping to make a quick buck. They just want to buy, and sell quickly, with no intentions to hold. People buy penny stocks in hopes of miracles. It may never come.
“People buy penny stocks in hopes of miracles.”
And when the bear market comes, penny stocks will collapse the most, with all the speculators running away back to their normal lives, locking up their poems account and swear not to speculate again. Until the next bull.
Thats when corrections come in. A correction similar to the month long correction we saw in 2006. Its healthy for the market in this sense. Its chases speculators away from the market, leaving the strong “holders” in the market, and hence, causing the eventual recovery.
“Corrections leave the strong holders behind, and thats the reason for the eventual recovery. Not cause of a miracle”
In addition, when the economy turns for the worse, the underlying companies of penny stocks, with no good cash position, has a higher chance of collapsing compared to large cap companies.
“When you buy stocks, it should be at least for companies with good financial positions and good business models. It should never be a random purchase.”
Speculating is not the way to invest. Its gambling. Would you rather invest in fundamentally sound growth companies that almost garantee returns, or continue gambling? If you do continue speculating, when there’s a change in market trends, do remember that you’re probably going to be one of the worst hit traders around.
Topics: Quick Lesson |
Comments
July 20th, 2007 at 1:04 am
Hi pehon,
Money does not grow on trees, it’s up to the individual to plant the seeds of wealth so that it will grow into a large tree in his own garden 20-30 years later ! Take a look at my blog post on the “madness of crowds” and it will explain the big selldown yesterday. Apparently, cut loss rules don’t work anymore as the plunge is so huge that there are no buyers within the gap. That is the disastrous consequence of over-speculation.
Btw, wondering if you could post your total overall gain (in % terms) besides your % gain per counter ? Thanks.
July 21st, 2007 at 11:57 am
Hi PeHon, I dont quite agree with you on your discription of penny stocks as “They belong to companies that have no fundamentals. No growth potential. No drive by the management to expand.”. Or”They are not owned by rich institutional investors. They are almost totally owned by penny stock speculators.” But before I go further I would like to understand more what are the other considerations, beyond those you mentioned above, of penny stock. Would you consider Unifiber, GlobalVoice, UMS, Firstlink, K1venture or Informatics as being penny stocks that fit your description (that I have quoted you above)?? Raffles Education was a penny stock…. Regards
July 22nd, 2007 at 4:36 pm
Hello WL, i do agree that several stocks that are now blue chip stocks started from no where as a Penny stock.
But with regards to raffles education, like several other companies, something must happen for it to start being viewed as a growth stock ie change in management, change in business model etc.
With regards to your selection of informatics, would you really want to invest in informatics? Yes, their (loss) has reduced from 70M to 22M to 5M from 2005-2007, but so is their turnover. Its recuded from 185M to 50M consistantly from 2003 to 2007. As such the market has rightfully priced the company at the current $0.1 level, from its $1.0 level in 2003, at the peak of their business. And yes, i think informatics is a penny stock. Business outlook is bleak.
First link is another example. They make penny profits, hence they remain a penny stock. Looking at the historical charts since ipo, they were at 0.27 levels at june 2004. thats the historical high. They have nothing to show in their results in recent times. probably the recent announcement “ANNOUNCEMENT OF ACQUISITIONS AND REALISATIONS OF ASSETS” caused a price rise in a very short term, its in my opinion a speculative trade if you were to invest in Firstlink. As mentioned, a miracle/change in business approach is needed before maybe you think of investing.
A good example is Lifebrandz. They have ditched their loss making business, and currently concentrating their entertainment business, including MOS and Cafedelmar. I’ve been watching this company as this company stands to indirectly benefit from rising occupancy in hotels and the F1 in 2008. However, the company remains at the $0.13 level due to the fact that the company is advertising too agressively, and investors liek me are still at the side lines, waiting patiently to see if the company is able to keep their cost down. Hence, in my opinion, if there was a penny stock you MUST buy, go Lifebrandz. But the time might not be ripe yet.
July 22nd, 2007 at 9:06 pm
Hi PeHon, your reply actually missed what I was trying to point out but they actually reinforced somewhat what I wanted to say.
The point I wanted to say is that penny stocks do have fundamentals, growth potential, drive by the management to expand and have institutional investors. Its just that they may be going thorugh a period of transient (some even going through healing process after some illness). If you write them off at this point, you will be missing out on some huge potentials. You got in Raffles Education @1.69 (presumably after the stock split). At yesterday’s close of 2.2 last Friday, your gain is still
July 22nd, 2007 at 9:10 pm
alamak. half my post got lost. Must be message broken.
July 22nd, 2007 at 9:57 pm
haha sorry rest assured i didn’t cut off your post on purpose =)
well, i guess penny stocks mostly don’t have fundamentals. If you can find one with possible good fundamentals, go for it. The returns are gonna be great.
The key is to see when these penny stocks start having a performance turn around.
July 23rd, 2007 at 9:41 am
(Reposted …last post broken …Haha PeHon, sorry I pak si buay chow)
Hi PeHon, your reply actually missed what I was trying to point out but they actually reinforced somewhat what I wanted to say.
The point I wanted to say is that penny stocks do have fundamentals, growth potential, drive by the management to expand and have institutional investors. Its just that they may be going thorugh a period of transient (some even going through healing process after some illness). If you write them off at this point, you will be missing out on some huge potentials. You got in Raffles Education @1.69 (presumably after the stock split). At yesterday’s close of 2.2 last Friday, your gain is still
July 23rd, 2007 at 9:51 am
***
(Reposted …last post broken …Haha PeHon, sorry I pak si buay chow)
Hi PeHon, your reply actually missed what I was trying to point out but they actually reinforced somewhat what I wanted to say.
The point I wanted to say is that penny stocks do have fundamentals, growth potential, drive by the management to expand and have institutional investors. Its just that they may be going thorugh a period of transient (some even going through healing process after some illness). If you write them off at this point, you will be missing out on some huge potentials. You got in Raffles Education @1.69 (presumably after the stock split). At yesterday’s close of 2.2 last Friday, your gain is still
July 23rd, 2007 at 9:54 am
something wrong. I m limited in space even after logging in. Will email u my full comments if you want…..if I can find your email on the blog. Other wise,not going to try again.