If I were to declare that 99% of all penny stocks are complete and absolute garbage, few would argue the point. Official statistics are hard to come by due to the enormous number of micro-capitalization companies.
In addition, anyone — and I do mean anyone — can start a publicly traded entity. By their default nature, penny stocks are not going to qualify for the upper echelons of the New York Stock Exchange or the Nasdaq. Thus, the requirements are far less intense.
Because of that, penny stocks almost always favor the issuer and rarely the investor. The company gets the cash, and you get a certificate of hopes and dreams. It’s very easy to get sucked into this trap, especially when you’re first starting out. Psychologically, it’s a lot more appealing to nab 11,000 shares of a cheap technology startup versus one measly share of Apple Inc. (NASDAQ:AAPL). In an overwhelming number of cases, penny stocks are trouble — that’s why I warned against them!
There are, however, those that argue in favor of micro-cap companies. One of them is Peter Leeds. For full disclosure, Mr. Leeds is a penny stock guru. But his website referenced interesting research in that the success or failure of newly issued penny stocks is highly dependent on their underlying sectors. Furthermore, initial public offerings of micro-cap companies are less susceptible to failure than higher priced IPOs.
I’m going to take the study with a grain of salt, and so should you. But I’m also going to borrow the general principle. Penny stocks are dangerous not because of their valuation, but the reasons for it. Too often, micro-cap stocks are run by people who don’t care or have businesses that are doomed for failure. However, there are the rare jewels out there that have a solid business and are waiting for that right opportunity.
Here are three extreme penny stocks that are several steps ahead of their over-the-counter peers.