Penny Stocks And Market Risk

By Author: Vandana singhal
Total Articles: 3
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If you pay any attention at all to the news, you know that hardly a day goes by without some new and dramatic swing in the stock market or at least in the general perception of where the market is going. The financial markets can be boosted or buffeted by anything from war or the threat of war, the latest unemployment numbers or, for that matter, the latest, cryptic utterances of the leadership of the U.S. Federal Reserve.

At first glance, this type of news update may seem to have little to do with the probable fate of your penny stock. The penny stocks in your investment portfolio are of course unlikely to show up among the 40 stocks that make up the Dow Jones Industrial Average any time soon, being small and newcomers to the market, and you may well have done your homework and picked a penny stock with a strong business plan and comfortable reserves. And, after all, you placed these investments in individual stocks, not in the market as a whole.

But no company operates in a vacuum. Experience has shown that penny stocks, assuming they are stocks in viable companies, tend to follow the broader stock market, albeit ...
... with a lag. This is usually the case because in bull markets the larger companies tend to get overpriced, driving investors hungry for yield in search of the bargains offered by penny stocks.

On the other hand, the linkage between penny stocks and the broader market can cut both ways. There were certainly many excellent companies out there at the time of the 1929 stock market crash, many of them penny stocks with solid money-making plans, but most of them went under due to prevailing market and economic conditions. All bubbles, assuming they are bubbles, burst eventually, usually to the detriment of the poor suckers who were the last to hold on to the asset. This is true for both the market in general and for the specific industry in which a company is competing.

So it is worth keeping in mind that the Dow Jones Industrial Average, the S&P 500 and other market indices out there are good indications of not only the prevailing sentiment of investors, but is also a pretty good indication of how wealthy these investors in general are (or at least think they are). Frenzied bull markets are of course great money-making opportunity while they last, but the smart investors will know when to bail. On the other hand, down periods could offer buying opportunities, especially in companies that are otherwise strongly positioned but undervalued.