The stock markets around the world have been crazy for the past two weeks. But has the recent drop stopped, or is it just taking a break before going down again? And even more important, what does it mean for smart people who buy penny stocks?
Wall Street just had its worst week of the year, and stock markets around the world fell sharply because people were worried about rising interest rates and slowing growth. After going up almost 9 percent in the first four months of the year, the Dow Jones industrial average has gone down about 6.5 percent since May 10, 2006, when it hit a six-year high.
Penny stock investors worry that the Fed will be so worried about inflation that it will ignore signs of a slowing economy, raise interest rates too high, and send the economy into a recession. This has hurt the stock market.
Last week, the U.S. Federal Reserve Chairman, Ben Bernanke, shocked investors in penny stocks when he said that the Fed will keep raising interest rates to keep inflation in check. This sent stock markets around the world into a tailspin.
And this choice will directly affect the penny stock market. Higher interest rates hurt the prices of penny stocks because investors think it will slow down the economy and cut into corporate profits.
Why, though, is inflation getting worse? Higher prices for energy. Traders and people who buy penny stocks are also worried that refineries and oil production sites in the Gulf Coast could be damaged again this summer and fall now that hurricane season has started.
And higher interest rates can have an effect on the economy as a whole. The interest rates that credit cards charge will go up. Rates on mortgages and home equity loans will also go up, which will make it harder for people to buy homes and slow down the housing market even more. In the end, it will cost more to borrow money for growth.
But does this mean that the penny stock market is doomed? Au contraire. Even though the urge to sell everything can be strong, some people see this as a great chance. "I wouldn't sell anything. I would most likely buy, "said one analyst in New York.
So how exactly does this offer a chance? Many companies affected by the market's downward spiral are cheaper now than they were a few weeks ago. And any experienced penny stock investor will tell you that buying a great penny stock when it's been beaten down isn't a bad way to make money in the long run.
If you can handle some ups and downs, that is. Even though many big investors have trouble dealing with the unpredictability of the market, it's par for the course.
So, "get a grip," said another person watching. After a month of crazy selling, the markets are now in a good place. Could the markets go down even more? Absolutely. No penny stock is a sure thing, after all. "Stocks are much cheaper now than they were two months ago," one thing is certain.
