Here’s your ultimate guide to safe investments in penny stocks which have been increasingly popular. You’ll get to know what they actually mean, what the associated risks are, and the common scams investors find themselves trapped into.
Penny stocks are known for yielding exemplary rewards. However, they are not without their own set of risks. It is imperative to exercise great care when investing in penny stocks. There are two main ways of investing in penny stocks but they are both considered high-risk strategies. Let’s first understand what penny stocks really are in order to shed common misconceptions and confusions.
What Are Penny Stocks?
Despite what the name implies, most penny stocks do not cost just a penny. Or, you’ll hear that a penny stock is any stock under $1. But that’s not entirely accurate either. In fact, any stock at $5 or less is considered a penny stock.
While you’l find some of the major exchanges such as the NASDAQ or NYSE, you’ll also find noteworthy ones listed on the OTCBB, or the “Over the Counter Bulletin Board” stocks. You’ll also find some listed on the riskier pink sheets, where listing requirements are less strict.
Benefits of Investing in Penny Stocks
For one, they’re cheaper and can offer bigger returns than a $100 stock. Then again, you really need to dig for the gems amid the garbage that exists.
Two, you can invest small. Not everyone has thousands of dollars to invest in a stock. Penny stocks allow you to invest small amounts without mortgaging the home.
Three, real opportunities exist. ACADIA Pharmaceuticals (ACAD) once traded at $1.05 a share with great news emerging on its Parkinson’s disease Psychosis (PDP) drug. Once it began to attract attention, the stock soared to more than $54.
Pitfalls of Investing in Penny Stocks
Along with its many benefits, there are pitfalls.
For one, they’re highly speculative and can carry more risk. Some are low-volume, making it difficult to get in or out of a stock. In addition, there’s not a great deal of regulation to protect you. In fact, some listings are unregulated, and can cost you a bit of money if you haven’t done your own due diligence.
Plenty of scams exist, too.
Pump and Dump Scams
This scam involves promoters popularizing unknown stock leading to inexperienced investors buying shares which leads to price pumping. As soon as the price has been sufficiently inflated, the fraudsters dump the stock making huge profits.
These scams occur when certain self-proclaimed expert Gurus promise to reveal their “secrets” to investment success in exchange for a “one-time” sum. Whenever you come across such a scheme, simply discard it. Never fall for the trap!
Since several scams lie ahead in this path, investors must ensure that they are aware and stay educated about the market trends. It is important to separate blatant stock promotions from credible equity research as a first step.
Look deeper into the credentials of the company management as well.
Furthermore, ensure that what you’re reading is legitimate stock research and not a stock promotion advertisement. Always make it a point to go through the disclosure sections at the end of the reports to find out if the report writer is being paid to write the feature. If you find that this is indeed the case, you know what you’re reading is not research but an advertisement indeed.
How to Find Penny Stocks to Own
One great thing about penny stock trading is that you probably do not need to look for a broker.
- Check penny stock listings on the OTCBB and Pink Sheets. Once there, start researching the companies on your own.
- Look up lists of the 10 best penny stocks and review.
- Do your due diligence. Is revenue and EPS improving quarter or quarter, year over year? Does it have manageable debt levels? Does it have a respectable team running the company? How has the competition fared? Is the company growing or hanging on by a thread?
Are Penny Stocks the Right Fit For You?
It’s not for everyone. In fact, a good amount of patience is required. And many times, it’s worth it. In fact, we once spotted ACAD at $1.05 before it ran to $54 years later.
To be a successful penny stock trader you must have:
- Patience to wait for solid investments to come along and only solid investments.
- Discipline to stick with penny stock trading over the long haul.
- You have to be willing to leave your emotion at the door.
Penny Stocks aren’t Easy… But the Potential Payoff Can Be Impressive
Imagine buying ACAD at $1.05 and watching it explode to $54 with an initial $5,000 investment. That’s quite a payoff.
Granted, many penny stocks are worthless, and most penny stock traders will lose a good amount of money. But if you can spot the gems in a heap of garbage, you stand to make a good deal of money. Just do your own due diligence. Don’t fall for scams. Have a good amount of patience. And you’ll be just fine.