The Importance of Share Prices for Penny Stock Investors

The Penny Sleuth Features: Penny Stocks, Options and High-Growth Opportunities! The Importance of Share Prices for Penny Stock Investors By Jonas Elmerraji March 5, 2011 Dear Penny Sleuther, Is there such a thing as a $100 penny stock? You bet! In the penny stock world, share prices get a whole lot of attention. Significantly more than they should. And that misguided emphasis on share price could end up costing you a lot of money. Today, we'll take a look at how share prices are set, how they can be manipulated, and the metric you should really be looking at to determine whether an investment fits the penny stock mold... It's not surprising that so much emphasis is put on penny stocks' share prices - after all, the name "penny stock" implies that shares trade for pennies. But that's not really the case at all. Keep in mind that people have been investing in penny stocks for more than 100 years - 100 inflation-riddled years. So basing an investment's definition on an unchanging unit of currency doesn't make a whole lot of sense. Shock Video: 123 Winners in 127 Moves - Get The Next Profit Alert on Wednesday This new presentation reveals amazing market strategy that recently cranked out gains with 97% success. This is easy. It's fast. You don't need special skills or connections. Check it out here. After all, a stock that cost just 50 cents per share back when Charles Dow created the Dow Jones Industrial Average in 1896 would cost an inflation-adjusted $12.93 today. That means the stocks that trade for pennies today would have been worth infinitesimally small per-share values decades ago - and that's for good reason. You see, companies have significant control over their own share prices. That's because they control the number of shares they issue. What they can't easily control is their total value, or market capitalization. When a company wants to lower its share price, all it has to do is split shares - in effect, they're cutting up their market capitalization into more pieces that represent smaller ownership. It's a move that makes no difference to shareholders (the total dollar value of their shares doesn't change in a split, they just end up with more shares that are worth less), but it can make a difference to investors who are lured by "cheap" share prices alone. Worse still, a company can also issue new shares, diluting their share prices and current shareholders' ownership stakes to raise capital. For companies with weak balance sheets and a need for additional cash, dilutive share issues are one of the easiest ways to raise capital. It's not uncommon to see shares of these kinds of stocks trade for pennies - they're diluting the value of their shares down to nothing! Of course, not all sub-$1 are inherently "bad", but it's obvious that share price is pretty worthless as a determining factor of an investment's attractiveness. Clearly, there's got to be a better way to go about investing in penny stocks... VIDEO: 6 Penny Stocks to Own Right Now... Penny Stock Fortunes is giving away SIX penny stock recommendations to all new subscribers! But you must hurry because these plays could explode at any time. Click here to watch the video now. Spotting Gain Potential in Penny Stocks Here at the Penny Sleuth, we've long said that penny stocks are one of the most attractive assets to pursue. They lead the way out of recessions. And they historically deliver outsized gains when compared to their blue chip peers. But share price isn't the key to defining a penny stock... Market cap is. Remember, market capitalization (also known as market cap) is the total value of a company. If you're looking to invest in small stocks with large growth potential, it makes a whole lot of sense to use market cap as your defining metric. Generally, we like to relegate our searches for penny stocks to those with market caps under $2 billion. This is the textbook definition of a "small cap" stock. All small caps have very similar trading and price characteristics, regardless of the share price they trade for. What to Focus on as an Investor It's crucial to think of gains in percentage terms - a 25% gain on 500 shares of a $1 stock is exactly the same as a 25% gain on 5 shares of a $100 stock. In both cases, your gains are a function of the total position size and the gain percentage - share price is completely irrelevant. All too often, our mailbag here at the Penny Sleuth is filled with questions from readers who want to know why we're talking about a $10 or $15 small cap stock when we're supposed to be a penny stock e- letter. But that's a dangerous way of thinking that could cost you serious missed opportunities and expose you to the worst stocks on the market. Instead, it's best to think of penny stocks as small companies, not companies with small share prices. Keep your eye on market cap if you want to reel in penny stock gains in 2011. Cheers, Jonas Elmerraji P.S.: A perfect example of the power of small-caps can be found in our premium small-cap stock advisory, Penny Stock Fortunes. In it, we've currently got open gains of 256%, 95%, and 41% all from small stocks that cost $5 or more when we recommended them. In fact, we've got more open gains than I can list here right now... That's how effective research-driven small cap investing can be. To join our readers, and see our advisory for yourself, just click here to learn more now... Urgent Profit Alert To Hit Your Inbox on Wednesday... Witness strategy that produced 97% success - 123 winners in 127 moves! You profits could start as soon as Wednesday. All the details - right here... The Importance of Share Prices for Penny Stock Investors Buy is featured at Penny Sleuth. The Secret $200 Retirement Blueprint Investing in Penny Stocks What Is Technical Trading Follow the Penny Sleuth on Twitter, here. Become a Facebook Fan of The Penny Sleuth, here. The Penny Sleuth, a free e-letter, offers independent news and commentary on small cap stocks, options and high growth opportunities. We sent this e-mail to KNUMASSCN@gmail.com because you or someone using your e-mail address subscribed to this service. Are you having trouble receiving your Penny Sleuth? You can ensure its arrival in your mailbox by: Whitelisting Penny Sleuth. To end your Penny Sleuth e-mail subscription, click: Unsubscribe. The Penny Sleuth is your free and independent source for analysis, commentary and news on small cap stocks, options and high growth opportunities. At the Penny Sleuth, we give your our 100% independence pledge. 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