Across the internet you’ll see all sorts of ads for penny stocks.
“2500% gains!!!” they’ll say. “Just pay us a fee.”
The concept is a lie most of the time, so do your diligence or ignore them. A penny stock is a company that is not trading on one of the major exchanges, or will likely be removed from a major exchange soon. Perhaps their share price crashed to such a low level that they fell below the exchange’s limit, or maybe they had poor reporting standards and were kicked off. Does that sound like a good investment?
Penny stocks are popular because they are so unstable and volatile and can have massive swings in price up and down very quickly. You can literally lose all of your money overnight, or multiply it by ten or more. Some people that are extremely experienced and familiar with some penny stock companies may actually be able to knowledgeably invest specific penny stocks, but for everyone else, it’s just gambling.
Another problem with penny stocks is that it can be a scam. They’re tiny or damaged companies, and are easy to manipulate. Insiders that own the troubled stock can easily send out a whole bunch of false reports about how the stock is “hot!!” right now so that people will buy, the share price will increase, and then the insiders can sell their overpriced shares, make a lot of money, and then leave investors with nothing.
Think about it.
The people promoting their ability to pick penny stocks for you for a fee are just telling you their success stories while leaving out their failures. If they were actually capable of consistently getting 2500% annual returns, then they could turn $10,000 into $250,000 in one year and into $6.25 million the next year. If this were the case, would they REALLY be sitting there trying to sell you ideas for silly little fees?
Instead, I advise investing only in healthy companies such as dividend stocks unless you’re an experienced full time investor that knows one of these out-of-luck businesses completely inside and out. The draw of get-rich-quick schemes are enticing, but if you start building wealth at a reasonable rate while young, you should do quite well in the long run.
Consider a more rational, long-term approach to investing.
8 Reasons to go with Dividends
Good and sound advice but the draw is so tempting. Who doesn’t want 2,500% gains?
In the end the price of the stock doesn’t matter, the companies ability to deliver greater value does. There is a reason penny stocks are already penny stocks and it probably has everything to do with the companies inability to deliver greater value.
As you point out, the stock price itself does not matter in most cases. On the extreme ends of the spectrum, however, it does come into play. As you point out, a company that has a very low stock price often has such a low price for a reason. A company typically does not intend to have a stock price that borders on the minimum allowed price of the exchange.
For the most part, when I refer to a penny stock, it has more to do with the nature of the company than the stock price itself. Tiny, massively volatile companies with huge swings in earnings are purely speculative bets unless the investor has an extremely deep understanding of the industry and the company.
An important rule of thumb is: “If it sounds too good to be true, then it probably is.” Most of the time, the only person making the money is the guy collecting the fee. If the guy were so good, then he wouldn’t ask for a fee, he’d ask for a percentage of the profits that he is sure to make. You hit the nail on the head when you called it gambling. Absolutely, there are people that make a living playing the penny stocks, but for each one you show me, I’ll show you 100 who have lost everything doing it.
There is only one way to guarantee being wealthy and that is a slow, and intelligent investment strategy that adequately invests for safety and growth. Unfortunately, many end up being old and broke because they spent their whole lives chasing get rich quick schemes. If they had invested that time and energy from the beginning on a sound strategy, then they would have retired long ago.
Thanks,
Timothy
Wealth Artisan Team Member