Wall Street likes to neatly package stocks into two main categories, value stocks and growth stocks. These categories are a hot debate among investors, who are trying to discern which is the best investing style compared to what is happening in the wider market. The fact of the matter is, that the type of investing you choose very much depends on your personal objectives. Penny Stocks
This style of investing is where you look for stocks that can bring slow and steady growth or are currently undervalued, for instance if the company’s present value is low against its actual assets or for its fundamentals, eg. revenue, profit or cash flow.
Value stocks tend to be:
- Long-standing companies with solid track records and trading history.
- Overridingly profitable over time although not seeing huge growth.
- Steady stream of revenue.
- Often, but not always paying dividends to stockholders.
This is a general rule, but of course not all of the points count for every value stock. As value stocks tend to show solid and consistent growth they are a good tool for the long term and for investors looking for more of a pension, due to dividend payouts and the stable nature of the stock.
Growth companies, unlike value stocks, focus more on growing their revenue fast, they are trying to be leaders in their sector and if you pick the right one early, this can bring large profits in the long term. These stocks can often be overvalued when compared to their fundamentals, due to the positive sentiment they attract, which in turn helps boost their stock price further. This type of stock is more suited for the investor who believes he or she can identify winners early on and is not particularly interested in receiving income along the way by way of dividends. This type of investor needs to be prepared to be in it for the long term and to ride the waves that these kinds of companies have to deal with as they are growing.
Opinions differ on this but the SEC classifies penny stocks as those with a value up to $5. These companies are often younger or have depressed stock prices, which is what makes this type of investing more risky. This can be for a number of reasons, including doubtful future growth or prospects. However if engaging in penny stock trading the idea is to find that show meaningful growth. With these you will have to hunt around more in order to find truly worthy penny stocks to invest in. When it comes to penny stocks a good strategy might be to leverage your investments using margin. That way a move of a few pennies can make a much bigger impact on your bottom line, however this also comes with the risk of amplified moves against you.
Main features of penny stocks:
- Penny stocks are usually much cheaper to buy than other stocks which can go into the hundreds or thousands price mark.
- You can generally buy more penny stocks as they are cheaper, usually under $5
- Leverage can help magnify profits of penny stocks, but can magnify losses also.
Are penny stocks compatible with value investing? Penny stocks naturally have a lower trading volume and liquidity as less people are trading them. This means it can be trickier to fill your positions, whether buying or selling. The best way to mix value investing with penny stocks is to find those stocks that are list on major exchanges like the NYSE and LSE, ideally rather than OTC (Over the Counter). This can be done, but as mentioned earlier, it requires more research and time. In this research you will need to consider factors including the company’s profitability, revenue and scale. So yes, penny stocks and value investing can mix, but it will take work and you should consider the inherent risks that come along with it.