Microcap FAQ

1. What is a penny stock?

A penny stock is commonly defined as any stock that trades for under $5 per share.  Penny stocks can be traded on any market.  The term "penny stock" does not have a strict definition. If you looked at General Motors lately you might be inclined to call it a "penny stock".

However, when we use the term, we are generally referring to a stock that is trading on a specific exchange. See below for a discussion on the different markets.
 
2. What is a microcap stock?

Microcap has a more precise definition and as defined by the SEC, a microcap stock is a company with a low or "micro" capitalization (total value of the company's stock). Generally, a microcap has a total market capitalization of between $30 and $300 million.
 
3. Are penny stocks risk free, or safe?

Absolutely not.  If you want absolute security, you can by US government bonds or a CD at your local bank.

Anyone that tries to sell you an investment that could double or triple your money in a short period of time and tells you it is perfect safe or risk free is lying. However, based on the experience of most of our readers, any equity, mutual fund or non-guaranteed bond falls somewhere along the risk spectrum.

Should you be investing your children's college savings in microcap or penny stocks? No, it would not be recommended. Fortunately, you can invest in this market with as little as a few hundred dollars and still get a surprisingly high return - but not on each and every investment.

4. Are all penny stocks required to file reports with the SEC?

No.  A company must file reports with the SEC if:

• it has 500 or more investors and $10 million or more in assets; or
• it lists its securities on the following stock markets:
• American Stock Exchange
• Boston Stock Exchange
• Chicago Stock Exchange
• Cincinnati Stock Exchange
• International Securities Exchange
• Nasdaq Stock Market
• New York Stock Exchange
• Pacific Exchange
• Philadelphia Stock Exchange; or
• its securities are quoted on the OTCBB.

 
5. When valuing a stock, how important is price/earnings ratio?

First of all, price/earning ratios or PE should only be compared to stocks in the same industry. Otherwise, it has little of no meaning. You also need to look at it over a period of time to see if there is an improving trend.

Microcapsadviser's opinion is that this measurement is more or less meaningless when discussing microcap or penny stocks.

We are dealing with young companies that are developing and deploying new technology or services. They are in the process of raising capital to continue to meet the needs of their business plan. They are aggressive and in many cases you will not find competitive products. You are betting on their future success and in most instances they will not have low PE ratios.

It’s much more important to know intrinsic value for a long term hold position.  For a trading position, neither is that important...the promotion is much more relevant.
 
6. Can I buy stocks from Microcapsadviser.com?

No. We are not brokers, registered representatives or investment advisors.  To buy any profiled stock, you must open a brokerage account with a full service, discount or electronic brokerage firm.

7. How much money do I need to start investing in penny stocks?

The nice thing about this market is that you can have fun (yes, I said "fun") with as little as $100.

With a stock that trades for .04 a share, you can buy 2500 shares plus a small trading fee. The stock might sell for a dollar in the future. Even if it goes to .20 a share, you can sell and make a small profit. As you become more comfortable and learn more, you might want to invest a little more.

Keep in mind that a $1,000 investment in a stock that sells for .02 gives you 50,000 shares. If that stock goes to .80, you have a $39,000 profit.

8. How do I know when to buy or sell?

Microcapsadviser.com will alert you well in advance when to buy.  We cannot tell you when to sell since every investor's financial position is different, every risk profile is different.

A stock can go from 2¢ to 15¢ in a day or two and then go back down to 2¢. Or it might take off and in a few months be trading at 90¢. 

Generally, if you've made enough money for you to be satisfied, you can't go wrong taking some profits off the table. We have bought into a position, sold most of it over a 5 day period and then bought it again at a lower price.

Once again, you need to use some common sense. If someone tells you that they can accurately pinpoint buy and sell points, why on earth would they be telling you? Why are they not as rich as Oprah?