Why Manias Affect Penny Stocks the Most

By Peter Leeds

When a company is worth billions, it’s more insulated against investor stampedes. The larger something is, the more energy it will take to move it, and the more professional eyeballs there are focused on every detail of the business.

In addition, most larger and midsize corporations have been around for decades. Their business models have typically matured. You will rarely see a multi-billion-dollar corporation suddenly get swept up in a buying stampede.

Instead, smaller businesses are the ones that are prone to getting swept up in investor manias. “Newness” is an important requirement for any stampede, and usually this cutting-edge factor is more prominent among the smallest of businesses.

Penny stocks are the perfect investment vehicle for investor stampedes and trading manias, because

  • They are small. As mentioned earlier, the tinier companies get involved with the most significant manias because of the perception that the impact of a new technology or trend is greater to a small company than a large one.
  • They are volatile. Nothing drives that feeling of “missing the boat” like volatility. When you’re on the fence about whether you should get involved, watching your friends gain another 20 percent will serve as a huge motivation.
  • They attract less-sophisticated investors. Penny stocks attract all skill levels of investors. However, when we’re talking about manias, mobs of newbie traders get roped in to the latest craze, and these are often the group that is largest and drives the price the most. Their arrival usually indicates the beginning of the end of the stampede.
  • Technology allows significant and rapid communication. In the Internet age, new technologies allow news to spread fast and promoters to reach millions of people.
  • Their ideas are new and often monumental. Often, newer companies are involved with cutting-edge concepts. If the idea of the business catches on with the masses, the shares can go sky high. Unfortunately, this may happen with or without a glimpse at what is usually a pretty ugly financial position.

If you’re playing the penny stock game, you’ll see manias from time to time. Often, years go by without one, while other times the investor stampedes show up more regularly. What’s important is being able to spot these manias, avoid the risks they present, and set yourself up to profit from them.

In today’s world, all stampedes and manias are linked hand-in-hand with penny stocks. Often, an investor frenzy will be born from the realms of low-priced, speculative shares. Other times, the trend may not technically start with penny stocks, but they always end up closely tied together. With modern mass-communication tools and digital delivery, and the vulnerability of small publicly listed companies to price manipulation, all media-worthy concepts now suffer a deluge of investments of the tiniest kind.