Penny Stocks and Index Funds

Like hard-core bikers sitting down for scones and teatime sips, one would think that penny-stock speculators and index fund investors would be worlds apart. The former aims for feast but more often than not bargains for famine, while the latter is willing to settle for steadier returns based on the general market's buoyancy.

Yet they're not exactly distant relatives. In fact, they may very well be kissing cousins.

The next time that you come across an index fund investor arguing the merits of conservative passive investing, let out a whistle. You can probably stir the pot even thicker by tacking on a phrase such as "looks like someone's sleeping with the pink sheets tonight" or "I never took you for a riverboat gambler."

See, if we're to roll with the traditional penny-stock definition of an equity trading below $5 a share, buying into your fractional chunk of the Standard & Poor's 500 includes 15 of the 500 companies that are trading for less than a fiver.

If you figured that the S&P 500 included only the country's leading and largest publicly traded players, you would be right. However, behemoths fall -- out of favor if not fading away entirely while still maintaining enough girth to stick around the popular market gauge. Remember when JDS Uniphase (Nasdaq: JDSU  ) was going to revolutionize the world of telecommunications? The stock fetched nearly $150 a stub back in 1999. Today it sits humbly at $3.27, still perched on the S&P 500.

Burnt Ciena (Nasdaq: CIEN  ) ? No problem. It still has its S&P 500 membership card even as its shares were changing hands at just $1.93 apiece yesterday. The turbulent shares of Delta (NYSE: DAL  ) are hitting the tarmac at $3.92, but you know which major market index welcomes the beleaguered airline.

From cash-rich and price-poor companies such as Sun Microsystems (Nasdaq: SUNW  ) and Gateway (NYSE: GTW  ) to actively traded bottom-dwellers such as Lucent (NYSE: LU  ) , if you're buying into the S&P 500, then you're buying into an assortment of stocks trading below the $5 mark.

However, that's why we have always broadened the traditional definition of a penny stock to exclude large companies -- and Lucent is indeed a $14 billion company. We also consider the $3 waterline a more telling "sink or swim" indicator than the $5 mark for smaller equities with single-digit prices.

But, yes, you cautious index investor you, what an odd collection of low-priced stocks you're holding.

Do you prefer index funds or actively managed mutual funds? Does the recent trend toward lower index fund expenses find you considering buying into the S&P 500 through a mutual fund? All this and more in the Mutual Funds discussion board. Only on

And if you're interested in doing better than the average performance offered by index funds, check out a free copy of ourMotley Fool Champion Fundsnewsletter. There are some funds out there with solid track records and impressive managers, and we're eager to introduce you to them.

Longtime Fool contributor Rick Munarriz thinks that a penny stock saved is a penny stock burned. He does not own shares in any company mentioned in this story.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 501601, ~/Articles/ArticleHandler.aspx, 5/26/2016 9:11:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 17,851.51 145.46 0.00%
S&P 500 2,090.54 14.48 0.00%
NASD 4,894.89 33.84 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/25/2016 4:02 PM
CIEN $16.84 Up +0.02 +0.00%
Ciena Corp CAPS Rating: **
VIAV $6.69 Down -0.03 +0.00%
Viavi Solutions In… CAPS Rating: ***