I recently watched an interview with Tim Sykes, the author of An American Hedge Fund. Sykes, who’s in his mid-20s discussed a few reasons why your 20’s may be a good time to explore the volatile world of micro cap stocks.
Here’s the interview:
Now, before you get too excited, there’s a lot of downside to playing penny stocks.
Investopedia.com has a great primer for anyone interested in highly volatile penny stocks.
According to Investopedia, there are four main reasons to be leery of penny stocks:
1. Lack of reliable information available to the public: The key to any successful investment strategy is acquiring enough tangible information to make informed decisions. For micro cap stocks, information is much more difficult to find. Companies listed on the pink sheets are not required to file with the SEC and are thus not as publicly scrutinized or regulated as the stocks represented on the NYSE and the Nasdaq exchanges; furthermore, much of the information available about micro cap stocks is typically not from a credible source.
2. No minimum standards: Stocks on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange. (Read What are the listing requirements for the Nasdaq?) Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on one of the major exchanges, the company moves one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies.
3. Lack of history: Many of the companies considered to be micro cap stocks are either newly formed or approaching bankruptcy. These companies will generally have a poor track record or none at all. As you can imagine, the lack of historical information magnifies the difficulty in picking the right stock.
4. Liquidity: When stocks don’t have much liquidity, two problems arise: first, there is the possibility that the stock you purchased cannot be sold. If there is a low level of liquidity, it may be hard to find a buyer for a particular stock, and you may be required to lower your price until it is considered attractive by another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate stock prices, which is done in many different ways – the easiest is to buy large amounts of stock, hype it up and then sell it after other investors find it attractive (also known as pump and dump).
Even with all the risks associated with penny and micro-cap stocks, there is a lot of upside if you choose the right ones to get behind.
Here are 3 Penny Buzz Stocks that we think are worth keeping an eye on:
Glowpoint, Inc. (OTCBB:GLOW): If you’re an avid ESPN viewer, you’ve probably seen Glowpoint’s technology at work. The company provides high-quality video conferencing technology to media companies. Trends like high definition video on the Web are creating a lot of opportunities of Glowpoint to grow its customer base, and develop new solutions. The company has a trailing P/E of 7.8, and has quarterly (yoy) revenue growth of 4.5 percent. Glowpoint has about $1.7 of cash in the bank, and earned about $0.51 per share last year.
Soyo Group, Inc. (OTCBB: SOYO): This computer, and consumer electronic products maker just unveiled 20 of its newest products at this year’s Consumer Electronics Show including bluetooth adapters, external hard drives, and HD TVs. The company’s Honeywell line of HD TVs is also being sold on Feb. 7th on HSN this Saturday. 9, Management projects total revenue will be approximately $110 million, with approximately $2 million in profit and $0.04 earnings per share.
Goldspring, Inc. (OTCBB: GSPG): Hard assets like gold and silver could make a comeback this year in light of the shaky global economy. The company just announced test results that revealed strong gold and silver mineralization in the deposit at the Hartford Complex in the Comstock Lode District of Nevada. The stock could be primed to make a run in the next few weeks, as the company is planning to announce
Just remember, penny stocks are volatile and erratic. If you buy a stock at $0.10 and sell it at $0.15, that represents a 50% return on your investment. A 5 cent decline, however, would leave you with a 50% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 50% loss is a $5000 loss. Do this twice and you’re investment is gone. Keep your stops close. If you get stopped out, move on.