Blog : Quiet Before the Storm

by Peter Leeds on November 25th, 2011

The last few months (and even the last few years) have tested investors in penny stocks.  The idea behind most, but not all, penny stocks is that they are generally newer, undiscovered companies.  Therefore, it stands to reason that most penny stocks get a lot of their value through speculation.

Specifically, the "worth" of a company is less relevant than the "potential."  Sure, these penny stocks may not be making money yet, but how much could they make if things go well?  That potential is what causes investors to buy, and the buying is hat drives the prices of penny stocks higher.

There is a premium that is therefore paid for the penny stocks, above their literal worth, which is their speculative value.  Picture a company worth 5 cents that is working on a cure for a major illness.  The closer that company gets, the more their speculative value will inflate, as more investors start believing.  

The funny thing about speculation with penny stocks is that it fluctuates in value and size.  Just as penny stocks go up and down in price, there are also underlying (and unseen) changes in the speculative premium.  Think of it like trying to lift weights while jumping on a trampoline.

While there have been times where this speculative potential has worked to drive prices of penny stocks well above their value (think the dot com bubble), we are unfortunately at a speculative low right now.  Penny stocks are not on people's radar right now.  

When most are just trying to get enough change scraped together to get some fuel so they can drive to the discount grocery store, they aren't looking to risk hundreds or thousands on some obscure tiny company.

When even major corporations are falling towards the price territory of penny stocks, investors aren't looking to buy up any 5 cent company.

At a time where the stock market is not widely trusted, and many dishonest promoters are pushing their penny stocks which awful fundamentals and crippling debt, it makes sense why people are shying away.

Now, newer investors would read this blog and think it means that now is a time to avoid penny stocks.  However, with speculation so low, it is the greatest time to pick up bargain values in penny stocks.  Not only are the prices cheap, but you aren't paying much at all for the potential of these companies, because you aren't paying for the speculation.  

There are great penny stocks available now that we're publishing in our newsletter, and they are trading at rock bottom prices per share.  While they might be worth $1.10 in actual value, you're only paying about $1.10, and that price doesn't factor in what these penny stocks will be worth in a month or four, when they start achieving their goals.  Speculation in penny stocks will return, as it always does, and the ones who profit the most from it will be those who position themselves effectively now, while the prices are on sale.