The two sides of penny stock volatility
Penny stocks are all too often bashed because of their inherent volatility. While their volatile nature can't be denied, it is not always a negative thing. Certainly, there are many cases of penny stocks (or microcaps) falling hard and fast, but how many times do quality penny stocks get recognition for soaring quickly and legitimately? Not often.
What is volatility? According to the convenient investopedia.com, this investment term refers to the variation in price for a particular company.
What causes volatility in smaller stocks? Quite simply, volume. Stocks that trade at higher average volumes tend to be less volatile, while stocks that trade at lower average volumes tend to be more volatile. And, because small stocks often trade at lower volumes, they typically are more volatile. (This is not to say that all lower volumes are volatile and all higher volumes are not.) Many factors affect volume, and thereby, volatility. A good press release can send a stock soaring, a bad press release, plummeting.
How can volatility be negative? Volatility can cause a stock's price to drop suddenly. As in the case of Fortune Industries (FFI):
Another way that volatility can be a negative is through constant ups and downs, resulting in little upward progress. As in the case of OurPet's Company (OPCO):
How can volatility be good? Investors stand to benefit from volatility in financially strong companies. The following examples are two companies that are (a) profitable and (b) growing. First, we'll look at FONAR Corp (FONR). Investors took interest in FONAR, which drove the price up rather quickly--the upside of volatility. The company's stock has been up and down over the past year, but it is up over 200% total. Two key runs have defined FONAR's year so far:
Second, we'll look at Vertex Energy (VTNR). Vertex is a rather volatile stock, up and down. However, recently the company has ascended quickly because of a merger and an acquisition. While it has been up and down, it is up almost 75% on the year. VTNR's drive has come recently with the announcement of its acquisitions:
Is it just small stocks that are volatile? Not at all. Some of the most common names associated with stock market success can exhibit major volatility. An example of one of these companies is Microsoft (MSFT):
Volatility has developed a nasty connotation. When looking at it, we often examine just the stocks that plummet quickly. However, we seldom look at the companies that benefit from volatility--the FONRs and VTNRs of the penny stock world. Volatility isn't always a friend, but it's not always a foe either. Due diligence (and even a subscription to The Bowser Report) can help you determine which microcap companies stand to benefit from a little positive volatility.
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Information in this blog post contains references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable. The charts used in this post were obtained from bigcharts.com.