Is the Penny Stock Market Affected by Riots in Egypt?

Last week, on January 25, 2011, mayhem in the streets of Cairo and other parts of Egypt, long thought to be a stable port in the Middle East erupted with a furious vengeance - if you can call peaceful protests furious vengeance. Stock markets around the world fell. It seems strange to me that companies that have nothing to do with Egypt should have to suffer for something that has nothing to do with them.

The riots first erupted in Tunisia, then spread to Egypt. Western nations, naturally fear it spreading to the rest of the Middle East. This fear causes uncertainty. A secondary reason is because even though Egypt is not a major oil producer nation, it controls the Suez Canal, where most of the world's oil supply goes through to reach the West. This causes more uncertainty.

The market hates uncertainty. When uncertainty rears its ugly head, investors head for cover under the always alluring golden umbrella. Gold shot up over $21 to close at $1,336.75!

Stocks, meanwhile, took a bit of a hit. Well, not all stocks. Penny stocks continued to fare well. And for micro cap stocks involved in some way with gold? They performed admirably well, with one or two in my portfolio actually doubling.

Then, this morning, February 3, 2011, Mubarak, the long term President of Egypt agreed not to run for another term, and peace seems to reign again. And surprise! The markets recovered, and gold prices fell. Penny stocks, meanwhile continued on their merry way.

And if Mubarak does step down, then the question becomes, who will succeed him and will he be as pro-West as Mubarak was? Either way, it appears the world will have to adjust to the fact that there will be less oil flowing through the Suez Canal. This will likely lead to higher oil prices, exacerbating inflation concerns already flamed by the global governments' stimulus packages.

I don't think smaller stocks will be affected much by the riots in the Middle East whether they come from Palestine, Tunisia, Egypt or Israel. Events such as riots cause uncertainty. Uncertainty only affects the share prices of companies that are thought to be stable - those companies that don't price uncertainty into their share price.

Penny stocks by their very nature are uncertain. So the risk should already be priced in. After all, the micro cap stock market is already volatile. It's ripe with uncertainty since you're typically investing in a start up that has very little cash, perhaps no revenues, and likely an inexperienced management team.

I think people invest in penny stocks because of, not in spite of, the perceived volatility. High risk, high reward. Let's face it: investing in penny stocks requires a certain appetite for risk. It requires a certain instinct for speculation. It requires a brass set, unafraid to stand up and be counted.

However, in my opinion, small cap stocks are safer than blue chips precisely because investors in penny stocks are more aware of the risks and so watch their investments much more carefully than investors in blue chips. And typically, penny stock companies are geographically contained. So unless a penny stock company is actually engaged in business in Egypt, the riots over there should have little or no effect on its share value.