Importance of Market Caps for Penny Stocks

An important financial consideration for examining penny stocks understands a stock's market capitalization. The market cap of a company is the price of a share multiplied by the total number of shares outstanding. If a company has 10,000,000 shares outstanding and a price per share of .25, then the market cap would be $2,500,000. The market cap is important depending on the type of investment strategy you are pursuing. Investors taking the value approach to investing in penny stocks would want companies that have been beaten down and are worth more than the market is valuing them at.

Let's take an example: XYZ Company is a small home building company just getting started. They are working on home development projects expecting completion in the next 1 to 2 years. XYZ has 10,000,000 shares outstanding. The current price of the stock is .02 giving the company a market cap of $200,000. As an investor, your job is to determine if the company is worth more than what the market values. Since XYZ has little to no earnings at this point, you'll have to do a little forecasting to determine if it's a good buy or not.

XYZ's latest press release states that a current development project is expected to have sales of $5,000,000 and will be completed in 2 years from now. Upon successful completion of this project, the company is expecting $2,000,000 in profits after expenses. Now, let's go back to the market cap. If the stock remains at .02, XYZ will have a market cap small than its profits. It's safe to say that most investors would think the stock is worth allot more than current market cap, if the company does indeed produce the $2,000,000 in earnings.

There are many other factors that could determine the outcome of the stock price in the above example such as a turn for the worse in the economy. But understanding market caps can be a reliable technique to understanding current and expected value as you go on your hunt to find the best penny stocks.

If you want to learn more then you can consult with the experts at Paradigm Capital Management.

Paradigm Capital Management employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact. The firm's three decades of experience provide an exceptional level of insight that is reflected in their high-conviction portfolios.

Call us 212.364.1830 or visit us here: https://paradigmcapital.com/