Penny Stock Obstacles - dummies

By Peter Leeds

Even if a penny stock you’re interested in is in the top 5 percent in terms of quality, it may still face obstacles simply due to its size. Several factors can easily derail smaller businesses, and anyone investing in low-priced shares should be aware of, and prepare for, some of these common situations.

Besides the fact that they’re smaller, and potentially have lower sales and proportionally higher debt, other reasons why penny stock companies have difficulty with many events are as follows:

  • Employee resources: Small companies are less likely to have dedicated employees for specific tasks, increasing the likelihood of the employees having numerous responsibilities rather than specializing in any one, specific duty. This can cause responsibility confusion and will very often create situations that are taxing for the employees. Meanwhile, the company may not have the funds to hire anyone to address unique needs as they arise.

  • Time resources: With fewer employees to deal with situations as they arise, and with a broader array of duties falling upon each team member, smaller companies very often run into time constraints that hamper their ability to run their businesses smoothly.

  • Knowledge and expertise: With fewer employees, smaller companies have less brainpower. When a company only has one technology officer, she will not be able to run concepts past others who speak the same language. When getting opinions on the latest advertisement idea, a marketing manager may not be able to generate as many, or any, valid options.

  • The respect factor: Other corporations, corporate customers, and even potential employees generally have less respect for small companies. For example, a lawsuit from an unknown, less-expensive firm hired by a cash-strapped penny stock, won’t strike fear into the hearts of its billion-dollar competitors.

  • Logistical chokepoints: With smaller businesses, employees and executives are responsible for everything. Sometimes one small or seemingly trivial issue, such as getting the CEO’s signature on a check, can delay numerous aspects of the corporation.

  • Lack of clear strategy: Smaller companies are notorious for operating on the fly. Operating in this way increases the likelihood that the company will make decisions and take actions that don’t adhere to the specific goals. In some cases, one executive will work directly counter to another, and neither can point to any specific strategy to clarify for them which path would prove best.

Ideally, small penny stock companies will grow their way out of most of these problems. While growth can be the cure for a low share price and diminished operational flexibility, growth can also add stability to the corporation and help it achieve a more solid business footing.

In small, and even medium-sized, businesses, executives are responsible for everything, at least until they hire the right people for the right roles. Of course, hiring and training then becomes another responsibility as well. Keep this in mind when looking into your investments. They may have shares trading on the stock market but are often still in the small-business phase of their life cycle.