First lets define a penny stock: A public listed stock that is trading at less than $1.00. They are among the most volatile and manipulated form of investment in the markets. These companies typically have no verifiable earnings and most importantly VERY often the target of scam artists.
In fact I would not consider a penny stock an “investment” they are strictly for speculation.
Before considering a penny stock to buy it is probably best to know which ones to reject right off the bat:
1. Stocks that are not traded on a major US exchange.
2. Companies that do not have verifiable earnings of $10 or more million per year
3. Any company that is an industry that you cannot understand, ie Biotech’s.
4. Any company that is promoted in an email, these are almost guaranteed to be scams.
There are two major myths regarding penny stocks that people believe that are simply not true:
Myth One, Large companies like Walmart and Microsoft were once penny stocks. People look at the current stock price and look at the adjusted stock price which takes into account all stock splits. However if you look at the actual IPO price for these companies you will see that the actual start price was $20 for Walmart and $16 for Microsoft.
Even though their IPO price adjusted for splits is 8 cents for Walmart and 19 cents for Microsoft. These were definitely not penny stocks people have been incorrectly adjusting for splits and thinking they started out as penny stocks and that is not so!
Myth Two, people are attracted to penny stocks is the fact that there is a lot of room for appreciation. Meaning that it is easy for a stock to go from 5 cents to 10 cents they will have made a 100% return. So you can buy 20,000 shares with $1,000 and make a quick $1,000.
While that is possible, actually being able to sell at that price is not as easy as it sounds also not taken into consideration is the fact the stock can drop 50% in the blink of an eye and you just lost $500 and you just lost half your money. People are only looking at the upside and NOT the downside to penny stock investing.
These companies frequently go out of business and you will potentially lose all of your money!
If you insist on speculating (I won’t say investing) in penny stocks, find yourself a good newsletter with people doing research and finding penny stocks that actually have a chance at succeeding and not blindly buying a stock based on an email. Better to go buy some lottery tickets, at least you have a chance!
Please see my reviews on recommended Stock Picking Service Newsletters: