Penny Stocks and Dark Stocks
From blue-chip giants to bite-size start-ups, stocks come in all different shapes and sizes. Let’s play the extremes. We’re all used to the big hitters, but can we find value in the obscure?
Saudi Aramco, Apple
Tesla, Uber, IBM
Beyond Meat, Wayfair
Papa John’s, Tilray
Old McDonald’s farm?
See no evil…
*A company’s market capitalization represents how investors value a company (total shares outstanding x stock price)
Top of the league, mega and large-cap blue-chips represent 90% of the value of American business. They carry the country, and while there’s nothing certain about the future of large incumbents ripe for disruption, awesome competitive positions do allow many granddaddy stocks to compound investors’ money safely over the long-term.
Power past those and on through the mid-cap battlegrounds where competition is fiercest, and you arrive at the opposite extreme. Down in the depths, you’re faced with overlooked small-caps, micro-cap miniatures, nano-cap mom-and-pop stores, and dark stocks left in the gutter to die. This is penny stock territory, folks!
Penny stocks often sell for pennies (who knew?), but it’s not a requirement. The term generally refers to under-regulated pink sheet companies, forced to trade ‘over-the-counter’ due to cost pressures, their size, or an inability/refusal to comply with the rules of a “proper exchange.” They’re one rung higher than ‘dark stocks,’ which truly are the bottom of the bottom!
Dark or “grey” companies have shirked their fiduciary responsibility altogether by deregistering from regulatory bodies. Some disappear off the face of the Earth, cutting all contact with shareholders (causing the stock to fall to zero). Others continue to file professionally audited reports, and will even pick up the phone if you call.
But in both the penny and dark stock underworlds, fewer rules are in place to protect investors. That’s the long and short of it. Good companies with revenues and profits get drowned out by frauds and bankruptcies waiting to happen, with most stocks so illiquid that they routinely go days without any action.
Most brokers have barred these stocks, and their lack of activity means 5-10% purchase premiums to the market price at a minimum, every time you trade. Few investors fish in this pond, but that’s precisely why some continue to leap into the dark.
“Experts” and thrill-seekers with nothing to lose sometimes find missed opportunities over-the-counter, dollars selling for dimes, and other big dislocations between price and value (especially after a crash). But there’s no room for error. These waters have claimed many unfortunate souls with their unpredictable undercurrents. Diversification is key.
Tell us, do you like ’em illiquid and hairy, or do you champion the best-in-class, quality names like Disney, Nike, Coca-Cola, and Apple? Let us know where your edge lies!