If you have been following the stock market, you should be aware of the current turmoil hitting the penny stock market. I have never been a big fan of penny stocks and this episode is a simple but effective reminder of the risks which you are taking if you speculate in penny stocks.
The combined market cap of the penny stocks went from $11 billion to approximately $1 billion. All 3 stocks dropped between 70+ to 90%+ in value. According to newspaper, many people lost a lot of money in these stocks, losing anywhere from few thousands to hundreds of thousands. It simply shows that punting is still very prevalent in the market and not many people choose to invest for the long term.
Mostly known for their very low price per share and high volatility, penny stocks are ideal for the trading game. However, they generally do not belong to long term portfolios. In general there are many issues with the penny stock companies.
1. They are generally very small and have no coverage from research.
2. Most of them do not have stable businesses, otherwise they would have been lifted out of the penny category long time ago.
3. Many of the penny stocks are loss making or do not have a good track record
4. Penny stocks are easily subject to market manipulation as they have very small market cap and react wildly to news. Therefore insider information can drastically change the stock price and makes insider trading very lucrative.
5. While per share price is cheap, valuation wise they can be far more expensive than the better known blue chip counters, especially when the stocks are loss making.
Interestingly, these stocks are all interconnected, for e.g. Asiasons is the largest shareholder in Liongold. While they are denying that insider trading and market manipulation took place, something must be wrong for the stocks to run up 15-18 times within a span of few months and then crash more than 90% in a few days.
Overall, I prefer to not bother with penny stocks. Like the many of the schips, the amount of risk, unavailability of information, high volatility makes it more of a gamble than investment.
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