We’re asked this question quite frequently. It never fails to boil my blood and make me want to smack some common sense into the person asking it.
The answer is always the same – NO.
Buying a penny stock is not investing. Investing is buying something with the reasonable expectation of realizing profitable returns through price appreciation and/or income. Notice that I said reasonable expectation.[ad#Google Adsense 336×280-IA]We all know that not all trades are profitable.
But by investing in a sound business, investors can reasonably expect to stay on the plus side.
For the sake of this argument, I’m defining penny stocks as those trading for less than $1.
I’d argue that penny stocks are not real businesses.
Trading over-the-counter, penny stocks are not required to disclose much information about their businesses to regulators or investors.
Most don’t have any revenues, profits, businesses or even business plans.
They don’t pay dividends and should never be part of any investor’s portfolio.
What’s worse, penny stock investors are easy prey to swindlers.
It’s so easy for investors to become blinded by greed and what they see as limitless profit potential. They fail to notice the obvious warning signals. Instead, they believe they can time the penny stock market and make a quick buck. But I’m here to tell you no investor can consistently end up on the right side of a penny stock trade – at least, not legally.
Consider this: If there were a way to legally profit from trading penny stocks, professional money managers would be exploiting it. There would be penny stock hedge funds whipping around blocks of these stocks all day long. But even the smallest of funds steer clear of this so-called investment strategy.
Almost everybody knows that penny stocks and fraudsters go hand in hand. Living in South Florida, one of the penny stock capitals of the world, I’ve met more than a few penny stock crooks. There are a lot of shady people where it is sunny.
Most penny stocks are illiquid – they hardly trade. In some cases, fewer than 100 shares exchange hands in a day. This is what makes them so attractive to promoters. The lack of volume means it doesn’t take much to move the price of the stock up or down. Professional money managers know this too, and it is just one of the reasons they won’t consider investing in this type of merchandise.
The typical penny stock scam is always the same.
A large shareholder, sometimes “management,” hires a promoter to “pump” the stock. This promoter may write and post glowing research reports and press releases on the Internet. The more aggressive ones will enlist the help of a call center or boiler room to promote the stock. Either way, the goal is the same. They want to increase the price and volume of the stock so someone can “dump” their shares. Once the shares have been sold, the promotion stops, the buyers dissipate and the stock usually tanks, winding up lower than it was before.
If you are considering buying a penny stock, remember this: Someone always has more information than you. Since the information they disclose is not monitored, most of the information you find will have been carefully crafted by a promoter to generate short-term interest in the stock. You won’t be able to determine what is real, what is hype and what is an outright lie. Only the penny stock insiders and promoters will know for sure. As the saying goes, if you sit down at a poker table and don’t see the sucker, it’s you.
To ensure a wealthy retirement, invest in real companies with growing profits that, preferably, pay dividends. Leave the penny stocks to the suckers.
Source: Wealthy Retirement