Penny Stocks – A Good Investment?

by on August 26, 2011

Are penny stocks a good investment?  I’m sure you’ve seen numerous emails, articles and advertisements promising to get rich by buying penny stocks.  Well, let’s look at the attributes of penny stocks and then decide if it is worthy of inclusion into your investment portfolio.

Low price.  By definition, penny stocks are priced below one dollar.  While this is alone is not a bad thing, it usually means that the penny stock has been delisted from any major exchange and now trades on the pink sheets or over the counter boards.  Many penny stocks can trade for fractions of a penny, which can make it difficult to accumulate a decent amount of stock.  Also, the low price typically indicates that the company has lost most of its value and is now a microcap stock.  In fact, penny stocks are usually companies that have gone bankrupt, out of business, or have done so poorly that they couldn’t keep up their listing on a major exchange.  Also, some penny stocks are reverse mergers, where all of the formerly bankrupt company’s stock is bought and the company then changes its name to the new company.  This is an inexpensive way for a company to go public, however, most reputable companies would not go public this way.

Low volume and lack of interest.  Because of the low price and lack of a major exchange or analyst coverage, there is usually very little interest in penny stocks, and therefore very little trading volume.  This means that even if you wanted to invest a lot of money in the company, it would be difficult because of the lack of trading volume.  The low trading volume also creates bigger price swings when buying or selling penny stocks.

No Wall Street support.  Penny stocks do not have coverage or support from Wall Street.  They do not have research analysts providing insight, commentary and liquidity.  And they do not have investment banks helping them create value for their company.  While this is not necessarily a bad thing in itself, it is one more attribute that makes it hard to find accurate information and opinion about the penny stock company.  In addition, most institutional investors (mutual funds, hedge funds) avoid penny stocks because of the low liquidity and lack of coverage.

High volatility and risk.  Because of the low volume, lack of institutional investors and lack of information, price swings in penny stocks can be very high.  In fact, purchasing a few thousand dollars of a penny stock that is trading at a few cents, could be enough to make the stock price climb by 10-40%!  And when you own a penny stock and want to sell, you may lose any gains you’ve made because of the downward pressure on the stock from selling that many shares.  Another risk is that penny stocks are often forgotten about and the stock can sit for years not trading at all or at prices below a penny, effectively becoming worthless.

Target of speculators and corruption.  If you do a search for “penny stocks” you’ll find many people promoting them as a way to get rich quick.  This is usually nothing more than a scheme known as pump and dump.  Speculators or corrupt investors buy up large shares of a penny stock, sending its price up substantially.  Then they advertise the stock and spread rumors of its great growth prospects.  Some people see the rise in the stock, believe the “story” and buy the stock, sending the price up even higher.  At this point the pumpers are “dumping” their stock at much higher prices and leaving you with the soon to be worthless stock.  Because many of these companies are not regulated by an exchange or by the SEC, this type of corruption and manipulation is very rampant in penny stocks.

Lack of trust.  Because there is very little information available about penny stocks, no research performed, and no institutional investors that believe in these companies, there is a huge lack of trust in these companies.  Add to that the rampant corruption and manipulation by crooked investors and there is a complete lack of trust in these companies.

Conclusion.  Looking at all the attributes we’ve covered above, I would say that penny stocks aren’t an investment at all, but rather a gamble.  And that they deserve no place in your investment portfolio.  With that said, there are always exceptions to any rule and there will always be a penny stock or two that offer great opportunity.  However, unless you really know what you’re doing and do your research properly, you’re chances of losing money are much greater than your chances of getting rich.

{ 30 comments… read them below or add one }

les February 9, 2012 at 5:35 am

Penny stock can be a good investment as long as you do the basics right, do your research and set your goals.

Reply

what are penny stocks May 18, 2012 at 8:01 pm

Are penny stocks a good investment for the novice trader? As complicated as this question may be “The Amazing Penny” is here to offer our expertise. Penny stocks are ideal for the beginning trader because of their low cost and high profitability. Our site provides useful information for the beginning trader to help you grow as an investor.

Reply

Terri Cleveland May 31, 2012 at 5:50 am

I have invested in penny stocks before and it went fine for me. Investment is a risk regardless of the type of investment you are making. You just need to learn the basics and make sure you get to learn them from a competent source.
Terri Cleveland recently posted..The Empty Gains Of An S Corp BankruptcyMy Profile

Reply

Stock Trading August 21, 2012 at 2:41 am

Like any investment, due-diligence is an important factor. There are some little gems out there to be found. But as the author states, research is the key to any success.

Reply

BJ August 24, 2012 at 11:35 pm

They’ve really run their race haven’t they, Penny Stocks? I think they fall much further toward the ‘risk’ rather than the ‘reward’ side of the ledger. If I was a first-time investor I wouldn’t be looking to get involved in Penny Stocks, regardless of how cheap they are to obtain.

Great write up, by the way. It was really well articulated.

BJ

Reply

pocs September 1, 2012 at 11:34 am

Here is my problem with stocks and been the penny stocks. They are great for people who have a nice amount of money to take a risk with. What about people who just don’t have hundreds much less than thiousands to take a risk. The stocks can be a brilliant return for a retirement, at a risk mind you, but it could solve retirement issues. How can someone on a budget play in the stocks without breaking their budget.

Reply

Maya July 8, 2013 at 11:13 am

I have to agree with your comment. You should really have a big amount of money to invest in penny stocks to see a nice profit and of course a good strategies. Not the best choice for beginners but you can definitely make money with them.
Maya recently posted..Introduction to Binary Options Markets FundamentalsMy Profile

Reply

Fren September 5, 2012 at 7:12 am

Penny Stocks were being pushed very hard a few years ago and it was hard to spot the scams. However, I get the feeling that these days peny stocks are a much more stable way to make money – after decent training and due diligence, of course.

Reply

Tom September 17, 2012 at 5:56 am

Stay away for penny stocks if you don’t know what you are doing. Otherwise, just read many books and keep practicing.

Reply

Stock Trader November 2, 2012 at 3:45 pm

I won’t touch a penny stock. Sure, there are people who make money trading them. There are also people who make money gambling…but most don’t.

Since there is plenty of money to be made trading listed stocks, I feel no need to venture into this high risk arena.

Reply

SouthAfrica Casino December 20, 2012 at 10:59 pm

I have heard many stories about stock investments, but this is by far good than the others. Thanks for sharing great information about penny stocks investment. Keep it up.

Reply

Steve togel December 26, 2012 at 2:11 am

Investment is a risk regardless of the type of investment you are making. Prediksi togel
I get the feeling that these days peny stocks are a much more stable way to make money – after decent training and due diligence

Reply

Samuel Lozano March 13, 2013 at 7:13 pm

I strongly suggest no one invest in penny stocks because 98 percent of them are what they
call pump and dumps.

Don’t get scammed. Be informed. Here is an article I wrote on the last major pump.
SWVI Stock

Reply

Penny Stock Tips April 14, 2013 at 1:04 pm

Penny stocks are not really an investment. If you’re trading penny stocks then basically you’re going to wind up being a day trader who deals has to deal with constant volatility. Penny stocks trading you will loose most of the time. BUT if you know what you’re doing the times you win, you can win big.
-Anthony

PS Always invest what you’re willing to loose!
Penny Stock Tips recently posted..What Are Penny Stocks and What Are Penny Stock SymbolsMy Profile

Reply

franky April 29, 2013 at 8:54 am

Investing in any aspect had its 50%-50% chance, in other words you are really gambling, whether big or small its doesn’t matter at all. For me and from anyone here penny stocks is still a good investment, u really have to know the basics and right information of doing it because investments has its own price.
franky recently posted..CA Deeds: Ideal Alternative To Traditional LendingMy Profile

Reply

Paul Shepherd May 1, 2013 at 1:23 am

I was planning to invest in penny stocks but after reading your article I am afraid to do so. Great Article. We ponder on other stocks to invest in.

Reply

Mitch Carson June 16, 2013 at 9:52 pm

It gives in depth information about penny stock and I have never read any article more comperehensive than this. Thanks for this valuable knowledge.Keep it up!
Mitch Carson recently posted..The Gold Awaits You with Tax Lien CertificatesMy Profile

Reply

Thomas June 20, 2013 at 7:58 am

Penny stocks are popular as low cost investment. But then that is it. The risks are high and the returns…., well that depends on how well you trade your stocks. Bottom line: Invest what you’re willing to lose.
Thomas recently posted..What is a Gold IRA?My Profile

Reply

Top penny stocks June 20, 2013 at 8:47 am

Very good analysis of penny stock. Penny stock is similar to other type of investment. One should have a good plan or strategy before making an investment. Thanks for sharing this great article.
Top penny stocks recently posted..Penny Stocks To AdvoidMy Profile

Reply

stocks Marketing June 25, 2013 at 12:44 am

Dear CHRIS,
I liked what you said about that the penny stock has been delisted from any major exchange and now trades on the pink sheets or over the counter boards
Continue this kind of articles because they are very good and useful, congratulations.
stocks Marketing recently posted..On the net Investing Within the Stock Market CurrentlyMy Profile

Reply

Rohit sharma August 9, 2013 at 2:07 am

i was learning about stock investment because i m c.a student , i found some good points in your article , i hope your article will help in study

Reply

exchange e money August 20, 2013 at 12:32 am

Most of the people think that penny stock is not a good investment but it is a good investment. This post has discussed all the benefits of penny stocks investment and how it is helpful and beneficial. Thanks for sharing informative post.

Reply

JD August 28, 2013 at 6:12 pm

All investments carry some form of risk but if you are well informed and carry out the needed research then you can do much better than the average person. While many of the points about penny stocks are valid it doesn’t mean that there is no money in penny stocks in fact quite a bit can still be made.
JD recently posted..Pink Sheets Penny Stocks – Investment TipsMy Profile

Reply

Andrew October 29, 2013 at 1:40 pm

Hi Chris,
this post is quite informative and contains much of the benefits and risks of penny stock investments. I agree that the penny stocks are quite low, but they can still be an option and can make you quite rich. Thank you for taking the time to post this and share some of your experiences,
Andrew
Andrew recently posted..Finding A List of Online Stock Brokers You Can Rely OnMy Profile

Reply

Ethan James November 4, 2013 at 8:14 pm

I would agree that penny stocks are not the best investment. At least not for new traders. Those who understand the markets well and are somewhat experienced can do well for themselves if they stick to a strategy.

Ethan

Reply

pennystockdefinition November 8, 2013 at 3:57 pm

Penny stocks are NOT a good investment for the long term. The reason for this is that most penny stocks are either frauds, or just very poorly run companies. This is the case for 99.9% of penny stocks so it doesn’t matter how much research you do, you won’t find a good company. Penny stocks should only be traded in the short term while they are liquid.

Reply

David Frost November 12, 2013 at 11:47 am

Small caps can make up a portion of your overall asset allocation. This component is considered speculative, however can be very lucrative. One of the best risk management techniques that enables you to let the winners run far and away is to take half your profits off the table if you achieve a 100% gain. Now you’re playing with the house money and can let it run. You never know, you may get one of those thousand point gainers.
David Frost recently posted..Check Your Emotions At The DoorMy Profile

Reply

Spencer November 20, 2013 at 8:49 pm

Penny stocks seem like a huge waste of an investment. Going for cheap stock to sell higher later is good and all, but like you said, most penny stocks have no chance of getting higher in value and end up being businesses that are dying out.
Spencer recently posted..Online Stock Brokers Comparison – Things That Can Save Your BaconMy Profile

Reply

Willeke Liselotte May 21, 2014 at 6:57 am

All investment has a risk. To reduce the risks, you have to do your research and set your goals.
And only then you can be gainer.

Reply

David Frost May 23, 2014 at 7:43 pm

Small caps can certainly make you a lot of money when they go in your direction. We are however getting into a period in the stock market when shorting stocks will be the more profitable method of profiting. As such, small caps will get and have been getting taken out behind the woodshed of late because they are usually the tell to the markets that a correction is near.
David Frost recently posted..Facebook Stock Is Setting Up For A Big MoveMy Profile

Reply

Leave a Comment

CommentLuv badge
This blog uses premium CommentLuv which allows you to put your keywords with your name if you have had 3 approved comments. Use your real name and then @ your keywords (maximum of 3)

Previous post:

Next post: