Penny Stocks & Micro Cap: High Profit and High Risk

Today, many big companies were used to be penny stocks, and they moved up to micro caps and even to large caps.

Penny stocks are the most profitable but they are also the riskiest while micro caps are less profitable but also less risky. It is another example of “nothing risked, nothing gained”. They are not followed by institutional investors (fund managers, pension managers, and insurance companies). Once a long while the small retail investors pick up some real gems.

Be warned that penny stocks are risky due to a lot of frauds, low volumes and huge spreads. You will be bombarded how many subscriptions making them millions with 1,000% or so returns. S/he may be trying to tell you the returns of Google, Amazon and so many of these stocks, but most likely they have not bought any of them. Even if they have bought some shares (so they can use it to advertise), they have bought a few shares, and/or they have not told you the many of the penny stocks they purchased have lost all or most of the values. If they really know some secrets to make big money, do you think s/he would share it with you?

These groups of stocks are different from the popular IPOs of companies such as Facebook. However, there are more companies that will fit into the most profitable category rather than the handful of big IPOs every year. I further classify this category into:

1. Penny stocks. They are stocks with prices less than $5 (with many exceptions) and are not listed in the three major stock exchanges in my own definition. They have fewer requirements from these minor or local exchanges (usually only their financial statements). This book usually ignores stocks less than $1 as they are far too risky. Don’t buy their stocks unless you fully understand these companies. The majority of them described in this book are traded in OTCBB (OTC bulletin board) and OTCQX (OTC Markets Group. In addition, there are many others listed in local exchanges in both the US and foreign countries. Some penny stocks are also named pink sheets (with symbol names ending with ‘.PK’). They are very risky as the filing requirements are almost none. The inter-listed pink sheets in their own countries such as Canada and Japan could be high quality, and some provide the same information as our large caps in their own country.

2. Micro caps. These are tocks with prices ranging from $1 to $20, with a market cap between 50 and 300 million and the majority of them are listed in the three major exchanges (a good sign). This is my definition. Some stocks are in the gray area. I bought ALU at $1 and it had a market cap of 1 B at the time. I still consider it a micro-cap stock however for my purpose as a potential turnaround candidate. First, practice your market timing. When the market is plunging, do not buy any stock as most stocks fall. In the early recovery, a phase of the market cycle defined by me, most stocks rise especially the beaten down, value stocks and the potential candidates to be acquired by larger companies. There are about 30,000 of stocks if including smaller and foreign exchanges.

How can you find the winners? Use one of the simple screens that are available to you free from many web sites such as Finviz.com or the one from your broker to find a handful of stocks. The filter criteria could be “P/E < 5 and E> 0”, “Sales Growth by 20%” or a combination. We include ‘market cap > 50 and < 300’ for micro caps. If the screens consistently find you winners, they are good. However, it can be more complicated than that. A strategy consists of buying stocks and selling stocks. Screening finds a small number of stocks according to our criteria. We still have to evaluate each of them in more detail. We also have to set our criteria as to when to sell the owned stocks.

Updated: 10/2021
Size: 210 pages (6*9)