Penny stocks can be attractive because they are in fact cheap. But what do you look for when picking penny stocks and how do you profit instead of losing your investment? History provides some insight. First, Investopedia defines penny stock.
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A penny stock is a stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. The term itself is a misnomer because there is no generally accepted definition of a penny stock. Some consider it to be any stock that trades for pennies or those that trade for under $5, while others consider any stock trading off of the major market exchanges as a penny stock. However, confusion can occur as there are some very large companies, based on market capitalization, that trade below $5 per share.
A penny stock with which you could have made money was the old Chrysler. At the start of the 1980’s Chrysler, a 50-year-old automaker was in trouble again. Its stock was selling in the single digits instead of at $40 where it was usually positioned. Then Lee Iacocca came from Ford and took over Chrysler. Here is what The New York Times had to say about Chrysler and other 10 super stocks of 1982.
WHO would have thought 12 months ago that Chrysler, the much maligned auto maker, or Winnebago, the once hapless manufacturer of recreational vehicles, or Pulte Homes, a builder, would not only weather one of the worst recessions ever but then soar past a stock market that was registering its biggest advance in history?
Chrysler was most certainly the surprise stock of the year, beginning just above $3 a share and breaking the $18 mark. And it was still spiraling upward in the final weeks of December. The No. 3 auto maker had cut costs to the bone to avert bankruptcy and had entered 1982 a shadow of its former self, needing sales of only 1.1 million cars and trucks to break even, versus 2.4 million a few years ago.
The stock subsequently went to the $40 range and those who knew what to look for when picking penny stocks were amply rewarded. What to look for when picking penny stocks is evidence that the stock has intrinsic value, a forward looking income stream.
Penny Stocks Today
Money Morning reports that the week’s 5 best penny stocks gained as much as 252%.
In today’s slow growth environment, the best penny stocks continue to attract investors because of their outsized gains. And each of this week’s five best penny stocks logged a double-digit gain last week.
In fact, one of the best penny stocks in 2016 is up an incredible 252% year to date.
While penny stocks can bring huge profits, they can also bring volatility. That’s why Money Morning experts recommend that penny stocks only represent a small percentage of your portfolio. And one stock should never account for more than 2% of your investing money.
The 5 penny stocks in question are Tyr Pharma (LIFE), Granay Montero (GRAM), Chesapeake Energy Corp. (CHK), Great Basin Scientific Inc. (GBSN) and Companhia Siderurgica Nacional (SID). The last one is based in Brazil, sells as an ADR on the NYSE and is involved in exports of raw materials to China. The stock jumped on better than expected March trade data out of China.
Any of these penny stocks might be a good buy going forward or in each case the expected profit bump might have already happened. Remember Chrysler when investing in penny stocks. The company was in and out of trouble over the years and finally was taken over by Fiat. You could have made nice profits with timely investments but not by holding to stock until the next problem arose.