Thanks to the recession in the USA, people have run away leaving their own homes and in some cases even their small children. When we delve deeper into the reasons for this occurrence, we come to the conclusion that this recession happened only due to the breakdown of the home loan market. In the USA, the home loan market is very erratic. Home loans were being doled out for as little as 2%. Can you imagine home loans for which are that cheap? You may well wonder how this was possible and how did the industry sustain itself at the rate at which it was doling out home loans.
But the main purpose of giving loans at that rate was to improve credit off take and give a boost to the real estate market. Nobody had at that time envisaged that it would result in this calamity. But the fact is that it has occurred, leaving behind many people without homes and many children without parents. This same bloodbath has been repeated in the stock market too. It has mainly affected the small and mid-cap top penny stocks. The reason why it has affected the penny stocks is not far to seek. There is less liquidity in the market due to the bad debts occurring due to the non payment of home loans and their interests, and hence people have started withdrawing money from the stock market to increase their liquidity or improve their cash position. As there are net sellers in penny stocks, the market values of the penny stocks are also going down. But this is not happening in all the small and mid-cap segments. There are some selected stocks which are still doing well and are quoting at reasonable rates.
These are the stocks that possess a sound business model and have good fundamentals. Their owners have more stakes in their businesses than the others who have gone bust and hence they are paying that much more attention to the management of their businesses. It is a general trend in the market that businesses which have a higher quantum of promoters’ funds are invariably well managed as the promoter himself has a lot at stake in the company. On the other hand, there are shares or penny stock that is not doing well. One reason for their bad performance could be over-dependence on external debts. The company which has a higher debt service coverage ratio is said to be leveraged adequately. For companies having a low debt service coverage ratio, their best penny stocks are not doing well. One just has to use scientific techniques like ratios to analyze any company and its share price in the market. Some of these rations are as under:
Earning Per Share
Price Earnings Ratio
Return on Net-Worth
Book Value per Share
Return on Net-Worth
Return on Capital Employed
These are the important rations that have to be evaluated before committing your hard earned money in the best penny stock.
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