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Penny Stocks: Profits & Pitfalls

 3 min read / 

With virtually negligible capital outlay and the capability soar over a short period of time, does the penny stock deserve its aura of malignity? Trading at under $5 per share, the penny stock can be viewed as a potential gateway into trading for newcomers.

However, the maxim ‘buy the rumour and sell the news’ could not be more false in this tier of the financial markets; often bounty hunters create hype around an upcoming company – the next rising star – to boost investor sentiment so new investors pile in. The value of the microcap stock soars and the bounty hunters swiftly sell off their stock and leave the new investors on the road to ruin. This is known as ‘pump-and-dump’ and is rife amongst penny stocks.

‘Short-and-distort’ is another tactic employed, with damaging tales told about the target company giving investors in long positions losing but the short-selling manipulators buying back for profit. Infrequent trading of penny stocks presents another pitfall; even if the stock is strong it can be difficult to sell.

Getting into the smaller penny stock upstarts is more hands on than its standard blue chip counterpart, with pink sheets or over the counter transactions conducted through a broker-dealer firm. This firm then contacts the firm who represents the microcap’s owner, and then the transaction is negotiated.

Often, specific analysis of a company’s product/service is more important than the perpetually shifting myriad of market conditions, such as how far into its life cycle is the product, does it have new ideas in the pipeline and how does its balance sheet stack up?

After riding the dotcom wave up to a share price of $114.53, Concur Technologies ran aground in 2001 after a market crash left it drowning at a measly 31 cents. Astonishingly, the stock increased by 34400% and generated almost $1 billion dollars in revenue in 2003. Concur is the flagship penny stock case in point, the success story that gives impetus to start-ups and aspiring traders.

Another peak-trough-peak story is that of the real estate investment trust General Growth Properties; a victim of the global financial crisis and over-optimism at the wrong time. The trust peaked at $67.00 in 2007 and then became heavily geared the next year to acquire more assets, coinciding with the credit markets’ rupture and hence being unable to restructure its debt. This saw a tumble to 67 cents into penny stock territory. Bill Ackman took a chance on the rock bottom stock and rode it up around 3400%, an astounding trade in any context.

On a note of caution, the fact that these stocks fell to such dizzying lows in the first place is enough warning of the volatilities associated with the microstock market. Plenty of investors stand to gain from this microcosm of finance, legitimately or otherwise, but such gains are attached to a significant capacity to fail.

2 Comments

2 Comments

  1. A Mate

    January 9, 2015 at 2:19 PM

    Real Nice

  2. Sophie Ingram

    January 9, 2015 at 6:02 PM

    Excellent, just excellent

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Companies

Whatsapp Launches New Venture Aimed at Businesses

 1 min read / 

whatsapp business

Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.

This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.

Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.

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Companies

Amex: Troubled Credit Card Company Reports $1.2bn Net Loss

 2 min read / 

Amex annual report

On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.

Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.

For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.

In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90.  JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.

“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.

American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.

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Companies

Tencent Extends Facebook Lead

Tencent Facebook

Tencent has shot past Facebook to become the world’s most valuable social network.

Editor’s Remarks: Although Tencent briefly overtook Facebook in terms of market cap in November, the recent selloff of Facebook shares prompted the Chinese tech titan to regain the lead. Facebook investors responded negatively to news that Mark Zuckerberg’s plans to highlight family and friend-based content on the newsfeed would reduce the amount of time people spent on the site. Shares in Facebook have fallen 5% since that announcement, enabling Tencent to gain a $19bn lead over the US company. Tencent’s growth has been spurred on by its diversification away from its flagship messaging app, WeChat, and into video games.

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