After a conversation about penny stocks with a friend, I’ll share some of my thoughts on penny stocks. I believe penny stocks are one of the most risky investment vehicles in the stock market. Here’s why:
- Often the small market cap of the company allows for easy price manipulations in pump and dump schemes.
- They are highly susceptible to hype. When the hype eases off, the share prices can deflate with it.
- Disclosures on most of these companies are often not great. Companies listed on pink sheets are not required to file to the SEC and are not as regulated. Most information about penny stocks are not reliable and sometimes biased. The companies can be on the brink of bankruptcy and you may not even know it.
- Liquidity is not always there. You may find yourself unable to unload your shares.
The biggest lure to penny stocks is that people are hyped into the potential upside of the stock. Supposedly the idea is that if you buy shares at $0.25 and the stock moves to $0.50, you’ve doubled your money! $1000 would also buy you 4000 shares! Well, more often than not, people realize there is a downside as well as an upside and can see shares plummet to less than a penny. Look at Plasticon International.
I’m not saying all penny stocks are trash. The idea of successfully investing in penny stocks to me is similar to throwing a needle into a haystack and then waiting till midnight to look for that needle. Many scamsters will have people believe that great companies such as Wal-mart started out as penny stocks is downright lying. Wal-mart was $0.05 on opening day ONLY if you adjust in dividends and splits. Wal-mart was never really a penny stock for it opened at $32.50.
The pump and dump schemes are the worst. Rationally thinking, no stranger in his/her right mind would ever mass mail a legitimate stock tip without malicious intentions. However, the greed of naive investors gives way to irrational thinking. Here’s an thought, if you want to catch pump and dump schemes in action, just check your spam. Every once in awhile gmail’s spam filters will let through a spam email hyping a penny stock. I like to track the stock’s rise (if I read the e-mail quick enough) and then collapse thinking about the investors (if we can call them that) that lost money.
All in all, if penny stocks are still your thing. Good luck.
finding them needles is half the fun. you just need to know where to look, or have a really big magnet.
hejustlaughs,
i must agree with you generally. i also think anonymous summed up the other side: “you just gotta have a really big magnet”!
a couple other points- bankruptcy in stocks is not always a bad thing. true, the day of filing produces a strong dip, but the price often bounces back and the issue continues to trade with zest for months. liquidity problems are easily avoided, as i think you know- just check the volume and time & sales and don’t trade more than the average trade size.
one “big magnet” is the use of technical analysis in pennystock trading, although i’ve personally moved away from that and into quantitative analysis instead (more reliable, imo). and the odd thing is that i’ve found it much easier to quant pennies than to quant bigboards BECAUSE pennies are more volatile. a true paradox. there’s a free quant algorithm at whattolearn.com — try it and you’ll see what i mean. yeah, i own it. it’s in the free demo download.
but like i said, i agree with you generally and glad you warn people- i’ve seen too many lose too much.