Link to the video: https://youtu.be/FjdPtI4uLQk
Many of us dream of buying 10-cent penny stocks and watching our investment rise to a value of ten or 100 times that sum. We’ve all heard the penny stock success stories of investors making hundreds, thousands, or even hundreds of thousands with these stocks.
But before you dive into the high-risk world of buying penny stocks, the experts investors know that there are key factors that affect the way these stocks trade. Plus, your potential to realize a big winning investment!
This is Lynn, and welcome back! Now for a disclaimer, this is not financial advice, but an opinion channel only. So, let’s go and talk about how to pick winning penny stocks, but first if you could give this video a thumbs-up in return for my hard work getting this information to you, it would be appreciated. And, while you’re at it, subscribe!
Now let’s discuss Share Price and Valuation
Many retail investors view penny stocks, especially those OTC stocks under $1, as affordable because they can buy thousands of shares versus a couple shares of a more expensive stock.
A $1,000 investment in an OTC company that trades at 10 cents allows the investor to buy 10,000 shares. Versus buying 10 shares of a company B trading on the NASDAQ, for example, that trades for $100.
But, it’s key to understand what you’re getting for your money. To do that, you have to check the number of the stock’s shares outstanding.
Let’s assume that both the companies shared similar fundamentals, including a market cap of $100 million, except for the number of shares outstanding.
The shares outstanding for the OTC company A are one billion shares, and the shares outstanding for the NASDAQ company B are one million shares.
For each of these stocks you own exactly .001% of each of these two company’s shares. So, if these stocks gained 9% in value, each of your investments would also realize 9% in investment gains.
What we do know is that each of these stocks are trading for their current share price of 10 cents or $100 per share, because that is what the overall investment community believes these stocks are worth.
Remember that just because you have 100 brown coins called pennies versus a single $1 bill, it doesn’t mean the pennies make you richer, or have more value.
But, always Beware of Dilution
For any investment, especially penny stocks you have to always check the share dilution before making or continuing an investment. Companies issue additional shares through the awards of employee stock options, issuing shares to raise capital in order to keep the business running, and through stock splits. Unfortunately, many penny stocks frequently issue new shares to raise capital, which further cuts into your ownership percentage as an investor.
For example, if our OTC Company A issued an extra 110,000,000 shares to raise funds in order to keep operating, it makes sense that the share price would decline to $0.09. This keeps the market cap at $100 million. Here, the business hasn’t changed, but the new injection of shares caused the share price to drop.
So, when investing or trading penny stocks, you need to find companies that have a commitment to not dilute the value of the shares held by existing owners.
Alternately, the NASDAQ company B, like many mature companies, is dedicated to building value for their stock holders. Because company B is highly profitable, they just bought back, 100,000 shares of their own stock. This move also sent the stock’s price up again, keeping its market cap at $100 million. Let’s look at this comparison chart. These two company’s moves means that you not only own stock that is worth more but you own a bigger piece of Company B. Your stock in the OTC Company A is now worth $900, and your stock in the NASDAQ Company B is now worth $1,110.
Now, how to Spot a Possible Penny Stock Winner?
Most companies that trade with share prices under a dollar have fairly small market capitalizations, but this isn’t always true. Check the company’s history and fundamentals.
Does the penny stock company’s management team regularly issue new shares to raise funds? Is the company profitable or does it have the potential to be profitable keeping its outstanding share amount the same? Is the company competitive in its sector? This analysis takes some work but you can eventually find those rare penny stock gems.
How do you check an OTC penny stock company’s share structure? OTCMarkets.com, add your penny stock ticker, here we will input the popular ticker HCMC. Then view the outstanding shares, authorized shares (an indication of further future planned dilution) and the share float.
As you can see from the chart of Monster Beverage, ticker MNST, the company’s share price was a mere 17 cents in January of 2004. Due to its impressive fundamentals and management team this stock has been on a steady rise since. Despite the bumps during the 2008 and 2012 pullbacks. Investors who kept an eye on Monster’s share structure, fundamentals, management and competition could have identified this stock. Then made a bundle from the tremendous rise in the stock price during the following years.
For 2022, remember that certain sectors have a larger bucket of stocks that trade under one dollar. Metals and mining sectors always include a significant number of penny stocks, and are a better bet for rising stock prices during times of inflation and rising interest rates.
I always love hearing from you, so please let know about your penny stock winners in the comments below, and then next you’ll want to view my video: 5 Signs a Penny Stock is Worth Millions