Why Penny Stocks Are Bad Investments

You have probably read or heard someone express the following sentiment: “I enjoy investing in penny stocks. It seems so easy to make money quickly because it is so much easier for a stock to go from $0.25 to $0.50 instead of $50 to $100.”

More experienced investors can recognize the logical fallacy in this. Regardless of a stock’s per share price, any doubling of the stock requires a doubling of the market capitalization (unless there are stock buybacks). If General Electric (GE) stock rises from $31 to $62, it is because the investor community thinks that General Electric is worth $560 billion instead of $280 billion. Likewise, for Rubicon Technology (RBCN) to go from $0.62 to $1.24, the valuation of the business must go from $15 million to $30 million. Both shifts require a 100% increase in market value.

A lot of people probably look at Berkshire Hathaway’s Read the rest of this article!