Penny stocks have been in existence for quite some time. People from all walks of life have been investing in small companies for many years. They invest in the stocks for various reasons. Some want to create wealth while others simply want to make quick returns. Penny stocks are quite unique from other investing options. Rather than choosing to put your money in large companies, you opt to invest in small companies that show future potential. This has led to an outcry from some financial and investing experts who view this form of investment as a waste of time, effort, as well as money.
Penny Stocks and How They Work
Investing in penny stocks involves buying the company shares. The company lists its shares in the stock exchange where the public is invited to buy the shares or stocks. This is one of the main ways in which a company can raise sufficient capital. The capital raised helps the firm expand or improve the operations. The capital may also be reinvested in other opportunities. However, the shares of the company will also be subject to market parameters. Economic variables such as volatility in the market, government policy, economic situation, profitability, or publicity may affect the performance of the shares and penny stocks.
Why Investment Analysis’s Disregard Penny Stocks
Quite a number of experts in the field of stock investing believe that it is not viable to invest in small capital stocks. They therefore advise people to steer clear of the shares. There are various explanations for their stand. First, small companies are easily swayed by the market forces. A slight change in the market may greatly affect the company. However, large companies are able to withstand the market volatility and will still remain viable even when the economy is depressed. This explains why stocks of large companies maintain their value despite poor market performance.
Winning through Fundamental Analysis
The views from the investing experts are true to some extent. However, they also miss the point of investing in the first place. Fundamental analysis is the best way to analyze future potential of a small company. This strategy is used by investments greats such as Warren Buffet. It basically involves four guidelines which are as follows:
- Product: Is the product new, does it satisfy a niche? Is it a quality product, and can it compete with existing products?
- Profitability: Has the company made profits in three or more years and what is its current debt?
- Resilience: Is the company robust enough to cope with soaring interest rates, inflation, or fuel prices?
- Management: how competent or diligent is the management? Do they furnish financial reports on time? Do they have open communication right from the CEO?
The largest company whose shares are “Blue Chip” started off as a small firm. And for it to reach its current status, some investors saw potential in the small firm hence deciding to invest in it. Analyzing and investing in small cap penny stocks may also be quite rewarding. This is the only way of discovering a future giant company yet paying a small fee to own it.