Don't shy away from micro-pennies
Oct 9, 2014 6:50:27 GMT 7
candy188, stevenlsf, and 4 more like this
Post by oldman on Oct 9, 2014 6:50:27 GMT 7
I define micro-pennies as stocks that sell for less than 1ct each.
Many investors look at the share price and shy away when the stock price is in this category. But seriously, it should not matter if a share is selling for 0.5cts and has 1 billion shares in issue as compared to another share selling for 50cts and has 10 mil shares in issue. Each has a market capitalisation of $5 mil and on paper, they are both equally valued.
But the perception is usually totally different because many investors look at the absolute share price first. If it is in the micro-penny territory, they are unlikely to want to look further into these shares. Herein lies the opportunity as many of these shares are less researched than others.
Also, there is something unique about micro penny stocks - it can easily double in value and at the same time, it can also easily half in value. In other words, if you choose your micro penny stock well, it can return you multiples of your initial investment. On the other hand, if you did not choose it well, you can almost lose your entire investment.
Put another way, when stocks are in the micro penny territory, one has to put in a lot more effort to ensure that one's analysis is as close to being correct as possible. Yes, there will always be a risk that one did not read the situation correctly and this is why, for micro penny stocks, it is even more important to have an even bigger margin of safety.
Yet, I did start the article by stating that on paper, it is the market capitalisation that matters rather than the absolute share price. But like it or not, the perception of Mr Market is different when a stock is trading in a micro penny range. As investors, we have to recognise this as micro penny stocks do exaggerate the effects of fear and greed.
There will be an increased fear of losing money as every tick in a micro penny range can mean losses of 10% to 50%. Yes, this is for every tick change in the share price. On the other hand, if the stock becomes bullish all of a sudden, greed feeds in as every tick can mean gains of 10% to 50%.
If you understand fear and greed well, you should not shy away from micro pennies if they have sound fundamentals. Rather, you should use your understanding of fear & greed to get the best entry price for your investment.
Many investors look at the share price and shy away when the stock price is in this category. But seriously, it should not matter if a share is selling for 0.5cts and has 1 billion shares in issue as compared to another share selling for 50cts and has 10 mil shares in issue. Each has a market capitalisation of $5 mil and on paper, they are both equally valued.
But the perception is usually totally different because many investors look at the absolute share price first. If it is in the micro-penny territory, they are unlikely to want to look further into these shares. Herein lies the opportunity as many of these shares are less researched than others.
Also, there is something unique about micro penny stocks - it can easily double in value and at the same time, it can also easily half in value. In other words, if you choose your micro penny stock well, it can return you multiples of your initial investment. On the other hand, if you did not choose it well, you can almost lose your entire investment.
Put another way, when stocks are in the micro penny territory, one has to put in a lot more effort to ensure that one's analysis is as close to being correct as possible. Yes, there will always be a risk that one did not read the situation correctly and this is why, for micro penny stocks, it is even more important to have an even bigger margin of safety.
Yet, I did start the article by stating that on paper, it is the market capitalisation that matters rather than the absolute share price. But like it or not, the perception of Mr Market is different when a stock is trading in a micro penny range. As investors, we have to recognise this as micro penny stocks do exaggerate the effects of fear and greed.
There will be an increased fear of losing money as every tick in a micro penny range can mean losses of 10% to 50%. Yes, this is for every tick change in the share price. On the other hand, if the stock becomes bullish all of a sudden, greed feeds in as every tick can mean gains of 10% to 50%.
If you understand fear and greed well, you should not shy away from micro pennies if they have sound fundamentals. Rather, you should use your understanding of fear & greed to get the best entry price for your investment.