Penny Stocks 101

Penny Stocks 101

Microcap stocks, also known as penny stocks, are stocks that are trading at less than $5 each with small market capitalizations typically under $300 million. More specifically, as Doug Casey defines it here, many of these types of stocks are more accurately defined as speculations rather than investments. They have no earnings or predictable cash flow, and can’t be evaluated in the ways that Benjamin Graham or Warren Buffett may value a company.

Casey, a legendary speculator, is also well known for saying that he would rather risk 10% of his portfolio for a potential 100% gain, rather than 100% of his portfolio for a 10% gain. The above infographic covers some of the ins and outs of trading such stocks, and many of the ideas presented can apply to junior mining, energy, and technology stocks.

From a potential downside perspective, many of the companies in this category can be risky, unpredictable, and thinly traded. However, for savvy speculators, these same stocks can provide upside that is hard to match. It is all about the approach.

Microcap stocks are inherently volatile, but for those that can stomach it, there is a big profit opportunity. Furthermore, hidden in the market are companies that do have game changing plans or discoveries that could see their valuations rise more than 10x (a ten-bagger, as industry people call it). The key is being able to put in the time, due diligence, and using the right strategy to discover these companies. Being able to let go of opportunities that did not work out by cutting losses early can also be a key.

Original graphic from: Timothy Sykes