While it is true that penny stocks are often considered relatively high risk investment because of a number of factors, they can also be a lot more profitable than investments in large companies. In fact, the statistics over the last many decades show who would a superior rate of return for small cap stocks. One reason for this may be the fact that these stocks often produce spectacular gains that can more than compensate for the losses on penny stock investments that go sour. If you use your common sense and judgment and go about investing in penny stocks in the right way, it can prove to be a profitable exercise.
Here are some of the reasons for investing in penny stocks:
-Over a period of time, as the statistics show, penny stocks may well outperform more conventional investments. However, because of their lack of visibility to the investing community, there will be windows of time when there is a significant gap between the current stock price and the fair value according to the fundamentals. Depending on whether the stock is overvalued or undervalued, you can profit by buying or selling if you can spot these gaps early enough.
-It is true that one of the disadvantages of penny stocks is the relative lack of liquidity which means that you may not be able to sell your stock at a price you want at a time of your choosing. However, this thin trading volume can sometimes work to your advantage. If investors start to fancy a particular penny stock, you will find a lot of money chasing a relatively limited quantity of stock. The inevitable result is that the stock price will zoom and you can cash in at a healthy profit.
-The relative lack of coverage by the financial community and investors as far as penny stocks are concerned can once again be an advantage. If you consider large companies, there are already a number of analysts and brokerages who follow the stock and there is therefore a lot of information in the public domain. As a result, only a dramatic development can result in significant changes in the stock price. In contrast, even a small piece of good news may be enough to move the price of a penny stock substantially.
-Large companies are much like ocean liners or oil tankers in that it takes them a long time to successfully change course in response to a volatile market conditions. However, small companies which are penny stocks can profit from their adaptability and flexibility and make the most out of any changes in their favor in market conditions. They are in close touch with the markets because this is essential for their survival and their managements tend to react more rapidly because of the lack of bureaucracy. It is therefore easy enough for them to record double-digit growth with favorable effects on their stock price.
-Large acquisitions are fairly rare and when a large company makes an acquisition, it is far easier for it to acquire a small company especially if it has large pockets. A promising penny stock will in all likelihood be an attractive acquisition prospect for a larger company. After all, for many years, Cisco Systems has thrived on its philosophy of acquiring a number of small businesses especially businesses with products that are ready to go to market.