Hi!
Why do the stocks become ‘Penny’ stocks and do NOT flourish ? The answer is extremely simple.
This happens because the Directors of those companies, possibly, do NOT wish that the stocks do better. Usually, such companies are NOT making a great profit and therefore neither their EPS nor PE is attractive. And yet, there is a lot of trading in such stocks.
Possibilities are many, but a major one could be due to the operators joining hands with the board and playing tricks that cannot be seen or caught.
At the time of the Year Ending, the stock taking is done. The physical stock of inventory for the work in process is taken as on the last day. One can easily play with this figure to inflate or deflate it. Anyone trying to verify it would be doing so after a time period of many months, which would make it theoretical.
With the closing inventory, the current asset values change, so for one year, the losses become very high and the stock prices collapse. That is because the work in process inventory is shown much less than what it is, and the difference is added to the next fiscal year.
This leads to either reduction of losses for the next year, or more possibly reporting a profit for that year. The stock prices shoot up, and there are plenty of fools available, who assume that the company has turned around, and buy those stocks.
Next year, they all find that the stock price has once again collapsed due to heavy losses, and then blame their luck.
All those, who take the stock market investment as a lottery ticket fall in the losers category. Winning a lottery ticket is not easy, and if one has won the lottery, others known him usually do not. So, if you heard that someone made money in Penny stocks, be sure that you will not.
That is what my opinion is, and I could be wrong.
Cheers!
SS