The Truth About Wall Street
By: Greg Guenthner
You hear it from talking heads on TV, financial pundits, brokers and analysts. They want you to believe that you have to buy large, expensive stocks, because it's how they make money off of you. If you choose to believe it, it will keep you at the bottom of the financial food chain for good.
This is what they want you to believe: To be a successful investor, you should buy only big-name stocks and hold onto them for years. Nothing could be further from the truth. What they really want from you is control of your money. They want you to leave it with them and forget it.
And here's why they hope you'll never bother to challenge the myth…
Your broker makes money whether your portfolio soars or falls. All he cares about is that you're buying or selling stocks. He takes his commission, and you're left with stocks that could be profitable, but are more likely just the "hot pick" of the week that will lead your portfolio down the drain in no time.
But as you're about to see, you can do a lot better. You can win at the stock market when you use the power of penny stocks to your own profitable advantage. And better yet, you can keep more of your money without worry that your broker's advice might be costing you more than just your cell phone minutes…
Exposing the Lies
First, it's important for you to know that the easiest way to make money in the stock market is by investing in penny stocks. And there are cold, hard facts to back up this claim.
The smallest stocks on the market — those with market capitalizations of less than $1.5 billion — have dominated the market recently, outpacing the large caps by a large margin so far this decade. But what many investors may not realize is that this is not a fluke. Historically, smaller stocks have always led the market.
A famous study conducted by Ibbotson Associates in the 1990s found that these small stocks outperformed all other stocks 56% of the time between 1926–1996 — including the blue chip stocks that get all of the media's attention. The average return in any given year was 14% for small stocks. It was just 9% for large stocks. And the longer you held your small stocks, the better off you were.
Since 1926, there has never been a period of 25 years or more in which investing in large-cap stocks has proven more lucrative than investing in small-cap ones. Of course, there are many reasons for these great small-cap returns.
First of all, there are a lot more small-cap companies on the market. About two-thirds of all the companies on Wall Street have a market cap of $1.5 billion or less. So as a penny stock investor, you have a much wider universe in which to find moneymaking opportunities.
And because there are so many small companies, the major brokerage firms and institutions don't have enough analysts to cover them all. So they simply ignore some of the fastest-growing companies on Earth. As a result, you can buy into some tremendous businesses trading for virtually nothing.
Smaller companies can also adapt to the changing marketplace and react quicker than their large-cap peers. Think about it this way: It's a lot easier for a $200 million company to double than it is for a $255 billion company to do the same.
Greg Guenthner is the editor of Penny Sleuth and Penny Stock Fortunes. The Penny Sleuth offers unbiased commentary from expert analysts and authors on Small Cap Stocks, Micro Cap Stocks, OTCBB and Penny Stocks.
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