Many investors continue to believe that the investment risk correlates with the company’s price per share.
They believe that the lower the price per share, the higher the investment risk.
As a result, many investors continue to avoid the penny stocks and focus on the non-penny stocks instead.
The penny stocks have on average higher volatility compared with the non-penny stocks.
However, numerous non-penny stocks have crashed and/or filed for bankruptcy over the last years due to their debt overhang proving the investment risk is primarily dependent on the leverage.
This idea was discussed in more depth with members of my private investing community, Value Investor’s Stock Club.
Fortunes are made in the stock markets when investors take advantage of the disconnect between perception and reality. On the flip side, fortunes are lost when investors are stuck in stereotypes and don’t want to check behind the cover.
That said, I have been dealing with the stocks markets over the last 30 years, so I have seen many corrections, recessions and crashes that taught me valuable lessons. Quite often, I share them with you. One of these lessons has to do with one of the most common misconceptions, the risk associated with the penny stocks.
The penny stock status refers to stocks whose pps is under $1 and these stocks are supposedly much riskier than those whose pps is above $1.
As a result, many risk-averse investors avoid them without a second thought, while others nibble on them and don’t want to be overweight because the “infamous” penny stocks are supposedly riskier than the non-penny stocks. In my SA articles, I have read numerous such comments with many investors saying things like: “… since it’s a penny stock, it’s a very risky investment same like gambling in Atlantic City’s casinos.”
In short, thousands of investors believe that the investment risk correlates with the company’s price per share and rises a lot when the pps is under $1. To me, this is a big mistake and I believe the following facts will shed light on this misconception.