Small companies and penny stocksI consider small companies. or small-cap companies, to be those with a market capitalisation (market cap) under $A100 M (million). Market capitalisation measures the size of a company and is determined by multiplying the number of shares that the company has issued by the current share price. Market capitalisation is easily found on online broker's websites. I avoid the multitude of this class of companies, including the so called ‘penny dreadfuls' or penny stocks; companies whose share price can be measured in cents. Penny stock status is usually determined by share price in cents, not market capitalization. Penny stocks are considered extremely speculative, particularly those that trade on low volumes; that is they are less 'liquid' and hence they may be difficult to sell once you own them. Investors in penny stocks may potentially lose their whole investment. As a new investors you may be lured to the appeal of penny stocks and small-cap stocks due to the low price and potential for rapid growth. However, good cheap stocks are not easy to find and severe loss can occur. Many of this class of stock lose all of their value in the long term. Why avoid small-cap companies and penny stocks? The smaller the size of a company the greater the risk of it going belly up if something goes wrong, as it won’t have many back-up resources to fix the problem. Large companies can lose millions of dollars and still manage to survive.
Return from Small Companies to Good Stock Investments |