When small businesses need to raise capital, they often go public by listing stock on the market. Some of these companies are tiny, or just getting started, and their value is still low, so they often trade as penny stocks. As such, penny stocks are a big part of the economy.
In addition to making significant contributions to the economy, some penny stock companies eventually grow up and become huge corporations with hundreds of employees and share prices of $10 or $50 or more. Most people don't realize that many corporations that used to be penny stocks helped build the economy from the bottom.
You're not alone
Buying penny stocks isn't as unusual of a practice as you may think. You may not realize all the people around you who have invested in penny stocks.The main reason that you don't hear about people investing in penny stocks is that most novice or new penny stock investors lose money. They don't want to talk about the $1,000 they threw away, and so they sweep their mistakes under the rug.
You will hear, or course, from the office jerk who is making money on a penny stock. And you probably heard about it yesterday, and will again tomorrow.
Despite the taboo nature of the subject among investors who have been burned, a quiet and significant army of penny stock traders is busy building personal wealth through these low-cost shares.
Next time you're at a wedding reception, family reunion, or office party, bring up the topic of investing. See if you can find people who will admit to trading penny stocks. You will certainly find a few, and probably more than you would expect.
Room to grow
In addition to the growing interest in penny stocks, many of the underlying companies are also expanding, making the economic footprint of smaller corporations more significant.A small company can grow in a variety of ways, including through
- Market share: A growing market share is a great indicator for the success of the underlying company. If that market share is being taken from direct competitors, a growing market can be an even better sign. Keep in mind, though, that a growing market share may take many months to show up in the earnings or share price of the penny stock company.
- Revenues/sales: Known as the top line number because it's displayed on the first line of the income statement, the revenues (sometimes called sales) shows you exactly how much money a penny stock is bringing in by selling their product or service.
- Employees: Growth in employees sometimes demonstrates an increased focus on capturing more sales. Other times it shows that the company is requiring a greater workforce to meet the increased demands of its customers. In either case, as a company grows, so will its headcount.
- Mergers, acquisitions, and amalgamations: When two or three companies merge into one, or they are bought out by a bigger corporation, a 10¢-penny stock can quickly increase in value. Of course, the original business model of the smaller company will be significantly changed. These events are also quite costly at first, and thus place an additional expense on the corporation. As well, such events are not always great for investors because, although the new company may be bigger and worth more, the original shareholders may not be given fair value in the new corporation.
- Recurring billing: You can easily analyze the growth in penny stocks that derive revenues from recurring billing and subscription fees. Track the number of recurring billing customers to have a clear representation of the underlying growth and upcoming revenues.
- Average order size: When the average order size per customer doubles, total revenues should theoretically double as well.
Growth is the biggest indicator of potential increases in the prices of penny stocks. If a company is enjoying higher revenues, hiring more workers, or fulfilling larger average order sizes, you can anticipate that the share price may perform very well.
