There are a lot of misconceptions about penny stocks. So, let’s cut through the 5 myths surrounding penny stocks.
Myth No. 1: Penny stocks have greater potential to double or triple than larger stocks do.
Investors believe it’s much easier for a $2 stock to become a $4 stock than it is for a stock trading at $100 to rise to $200. But a stock’s price will have no effect on whether it can rise 10%, 20% or 100%. What matters is how much supply and demand there is for the stock.
Myth No. 2: All penny stocks are tiny companies with little revenue or profits.
There are quite a few stocks trading under $5, such as TransGlobe Energy (Nasdaq: TGA), which is profitable and growing and Destination XL Group (Nasdaq: DXLG) generating more than $500 million in revenue last year. Sirius XM Holdings (Nasdaq: SIRI) has a $24 billion market cap and generated more than $8.5 billion in revenue last year. It trades for around $6.
Myth No. 3: Investing in penny stocks gets you in before Wall Street’s big players.
This is partially true. Many mutual funds and other institutional investors have their own rules against buying stocks that trade below $10. But many others do not have those restrictions. There are plenty of hedge funds and other institutional players that own penny stocks.
Myth No. 4: Penny stocks don’t pay dividends.
Most penny stocks don’t pay dividends because many are still young companies in their early growth phase. But some do. Sirius XM and Manhattan Bridge Capital (Nasdaq: LOAN) are two examples of companies that pay dividends.
Myth No. 5: All penny stocks are risky.
While some penny stocks have little value, others are priced low for a reason. But there are plenty of quality companies that are just beginning to gain some traction, undiscovered by financial analysts that make a great investment.
Penny stocks can be lucrative as long as you know what you are doing. Only start investing in penny stocks when you understand the risks involved, the potential for profit, why you are in it and your risk management strategies.
Sven Franssen