The recession has beaten many of the best penny stocks black and blue and many a trader who has invested their money in small and mid-caps has suffered losses. The reason for the recession is the breakdown of the home loan market. But it had a cascading effect on other markets as well. Due to the recession in the home loan market, money was sucked out from the other markets like the stock market. This resulted in the fall in market values of many scripts on the NASDAQ, NYSE, etc. This has in turn affected the confidence of many day time traders and some of them have closed shop as they have suffered many losses. But if we analyze the real reasons for the debacle in the stock market, then we will find that it has happened more due to the human tendencies rather than a cascading effect of the home loan market.

You may not understand what I am talking about. Well, to emphasize my point further, I would like to say that there was a fall in market rates of all the scripts across the board, which should not have happened as all the penny stock were not affected by the calamity in the home loan market. When people bought scripts they did not analyze the fundamentals of the companies before they took the buying decision. Most of them fell prey to what is called as herd mentality in investment parlance. To explain further, I would like to say that assume an individual A has put his money in some penny stock say GE about two years ago. After a period of six months the stock price shot up by 30% and the people who had invested in those penny stocks made money. As they made money, looking at their results their friends also invested their hard earned money into those very penny stocks. This was done to earn quick gains.

The objective of investment of the people who had invested in the penny stock two years ago and those that invested after that was not same. The people who had invested their money two years ago had studied the company fundamentals and gone through the balance sheet and made a thorough study of the company mission and future plans. So they could predict that this penny stock would go up in the near future and they put their money in it. However, the people who had invested their money later, did not do any such thing. They blindly followed the herd. Because the earlier people had made money in the penny stock, they also committed their money into it. When the market fell then their aspirations also went bust and they suffered heavy losses. This is not the best method to buy penny stocks in the market. There are certain key ratios that have to be analyzed before we can commit our money to these penny stocks.

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