Peril of penny

Before the subprime crisis erupted, all punters were busy chasing penny stocks. Stock that was previously few cents became 10cts of more over few weeks. The market was filled with all sort of speculation. Obviously, that was the sign of the end of bull market (although I don’t believe the bull has died now).

In a typical market cycle, blue chips would lead the first wave of appreciation. Once the blue chip became pricey, the second and third liner would follow. Eventually, the penny/junk stock is the last in the party. Once we see the penny shoots like a star, we can gauge the top is near. When the correction comes, penny falls the most and might never recover.

If you check back on the penny that was hot just few months ago, you would notice that the price has come down a lot. More than 50%? Possible. Sometime, when the stock just gotten too hot, broker would impose a trading curb to manage their outstanding position. Penny is the most hardest hit. Recall the Uni Asia case?

Lesson learnt here is don’t chase the penny blindly base on the volume and speculation. Fundamental is still important in stock picking/trading. I think everyone got the urge to earn quick money, there is nothing wrong with it. However, just make sure when the tide turns, run faster than others.