The Finatical
Week of September 21st, 2021 - Understanding Penny Stocks, Delta's Impact on Global Manufacturing, Inflation in Europe
FinaticTips - 3 Tips to Understand Penny Stocks
Penny Stocks are more than just what made Jordan Belfort incredibly rich in the Wolf of Wall Street. Let’s dive into them!
What are Penny Stocks?
Penny stocks refers to the stock of a small company that trades for less than $5 per share. Penny stock trades are made on platforms such as the New York Stock Exchange (NYSE), via over-the-counter (OTC) transactions through the electronic OTC Bulletin Board (OTCBB) or through the privately-owned OTC Markets Group. Penny stocks are different from blue-chip stocks (stocks of big companies) as they have a higher level of risk involved but also have the potential to offer overwhelming gains.
Risk vs Reward
Several factors can make penny stocks seem extremely risky. The position of penny stocks in the market involves a lot of uncertainty and oftentimes investors might have to sell their securities at extremely low prices to attract buyers. As penny stocks have low liquidity, it is really difficult to attract buyers. Instead of just ignoring penny stocks, specific precautions can be taken while investing in them. For example, an investor should have a stop-loss order predetermined before entering a trade and know what price level to exit if the market moves opposite of the intended direction. Stop-loss orders set a price limit that, once reached, will trigger an automatic sell of the securities.
As small companies have the potential to defy expectations and might even reach new heights, penny stocks can have explosive gains but it is important to keep realistic expectations and understand that penny stocks are high-risk investments with low trading volumes.
Here are some factors that make penny stocks seem unattractive to investors:
Lack of Information Available to the Public
It is often said that it is best to properly research a company before you invest in it. In the case of penny stocks that is quite difficult. Lack of information about the company’s performance and objectives can discourage some investors from investing in penny stocks. The information that is available about small companies may not always come from the most credible sources.
Lack of History
Poor track records or no track records at all can give the public insufficient information about the company’s current financial position and future prospects.
Liquidity and Fraud
Low liquidity levels of penny stocks might mean that investors may not be able to sell their securities at the optimal price. Abysmal liquidity levels force some traders to resort to fraudulent tactics to sell off penny stocks. That is exactly what lead to Stratton Oakmont’s success boom.
In such cases, Traders overhype the reputation of some penny stocks and pump up the stocks’ standing in the market. Once the stocks have been purchased by the investors, the market realises that there was no particular reason for the stock’s rising price but by then it is already too late and the investors begin to suffer huge losses.
Pros and Cons
Pros:
Offer a place for small companies to gain access to public funding.
In some cases, penny stocks may provide a method to gain access to larger marketplace listing.
With a lower price, penny stocks allow for significant upside in share appreciation.
Cons:
Penny stocks lack a liquid market with few buyers, perhaps even after their price has increased.
There is limited information available on the company's financial record.
Penny stocks have a high probability of fraud and bankruptcy of the underlying company.
FinaticTrends - 2 Financial Trends
1 - Delta’s Impact on Global Manufacturing
In August, the global manufacturing industry decelerated due to pandemic-related supply chain issues. In China, factories and ports were disrupted by outbreaks of the Delta variant and the resulting restrictions imposed by the government as part of its zero-tolerance policy. In Southeast Asia, many factories shut down as the Delta variant became a significant problem. Although global demand for manufactured products is mostly strong, factory and port interruptions, shortages of transport capacity, hoarding of key inputs, and resulting shortages of those inputs have all contributed to the decline of industry growth—especially in East Asia. The growing gap between supply and demand has also contributed to rising inflation in many countries. The disruption in China, combined with local outbreaks of the virus, have significantly hampered the industry in Southeast Asia. The PMI for ASEAN remained unchanged at 44.5, having fallen significantly from June to July as the pandemic worsened. The current PMI is at a level indicating a rapid decline in activity. Of particular concern is Vietnam, where the PMI fell from 45.1 in July to 40.2 in August, a level reflecting a dramatic decline in activity.
2 - Inflation in Europe
Inflation in the 19-member Eurozone suddenly accelerated sharply in August, raising questions about whether the current easy monetary policy of the European Central Bank (ECB) ought to be reconsidered. In August, the consumer price index was up 3.0% from a year earlier, the highest rate of annual inflation since November 2011. This was far higher than the 2.2% clocked in the previous month. Prices were up 0.4% from July to August. When volatile food and energy prices are excluded, core prices were up 1.6% from a year earlier, also the highest in about a decade. Core prices were up 0.3% from July. The difference between headline and core inflation is due to the very large increase in energy prices. The surge in inflation likely reflects the supply chain disruption that has affected the global economy. Within the Eurozone, some countries experienced relatively high inflation. For example, from a year earlier, prices were up 4.7% in Belgium, up 3.4% in Germany, and up 3.3% in Spain. At the same time, prices were up a more modest 2.4% in France, up 2.6% in Italy, up 2.7% in the Netherlands, and up 1.2% in Greece. The inflation in Germany is especially noteworthy as it is the highest in 13 years and is at odds with Germany’s historic role as the low-inflation economy in Europe.
Financial Guidance
“Financial freedom is available to those who learn about it and work for it.” ― Robert Kiyosaki
Reading this newsletter brings you one step closer to financial freedom.
Money Fact
The world's least valuable coin is worth next to nothing. Uzbekistan's tiyin is worth around 2,400 times less than a US one cent coin.
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