Sunday, February 26, 2012

Misconception About Penny Stock Prices

Many people like to purchase only low priced/penny stocks because they offer higher potential gains. A common phase we hear is "I like to buy 10-20 cents stocks because I can double easily and I will make a 100% profit".

Hey, "stocks are priced low for a reason, just as stocks priced high are there for a reason".

Like anything in life, quality is never offered at a discount. Eg. When you are in the market for a car, you don't expect to purchase a Mercedes for the price of a second-hand Proton Saga.

Stocks are valued at their current market value or perceived value under the current situations. A 10 cent stock is trading at this level because it is only worth this much in investor's eyes. A stock priced at $10 or $20 is trading at these levels because of a quality that the lower priced stock does not have. Institutions, such as mutual funds, will not purchase a stock at 10 cent based on strict internal rules and fund guidelines. Stocks move based on vast amounts of support from institutions that have the buying power to propel prices 100%, 200% or more in less than 12 months.

A quick study of stock market history will prove that the majority of stocks priced at $2 or less will be de-listed or bankrupt before they ever give an investor a triple digit return.

High quality stocks are typically representative of high quality companies that usually have innovative products or services that are increasing revenues and earnings thus peaking institutional interest. We have seen many such stocks double or triple during the past 5 years.

Always buy the stock that presents the highest probability of success based on both fundamental and technical analysis. The price should never matter nor should the lot size. A 25% gain will always be the same whether you buy a $2 stock with 5000 shares or a $100 stock with 100 shares.

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