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Penny Stocks

© Kirk Lindstrom

Definition

Penny Stock: Extremely speculative, high-risk stock, usually with a price of less than a dollar per share. In the U.S., nearly all are traded on the over-the-counter bulletin board. They are sometimes referred to as "Pink Sheet Stocks".

Why buy Penny Stocks?

Smart investors avoid penny stocks.

• Many have a rule that you should never buy a stock that is trading under $5 a share. Statisticians note that 75% of all the companies whose stocks trade for less than $5 per share (whether on or off the major exchanges) go bankrupt over any ten-year period.
• The spread between the bid and the ask can often be larger than the total return on the S&P500 for a full year!
• The obscurity and low price of penny stocks makes them tremendous targets of fraud and manipulation
• The rules and protections for individual investors are not as well policed for penny stocks where often the companies are not even in the United States.

With all of this going against Penny Stocks, people still buy them. Some of us consider it gambling and budget accordingly. Others consider it an interesting way to invest the top 1% of their investment risk pyramid where they might lose their money nine out of ten years but then they get a ten times gain on the 10th year to break even and make it worth the time. People buy penny stocks who don't fear losing all their investment as that is often the result.

Penny Stocks?

Taken from Allan Gust's post Penny Stock Mentality

So what type of investor trawls penny stocks?

1. He's willing to buy a 9¢ stock that's 9¢ because nobody else wants it.
2. He's willing to wake up in the morning and find his 9¢ stock now 4¢, or his 50¢ stock now 28¢ and still enjoy his breakfast profusely, because he knows he's picked a winner.
3. He's willing to average down from 50¢ to 9¢ and will buy heavily at 9¢ so the great majority of his stock is purchased at the cheaper level. Hey, he believes in the stock. Of course, the stock slips from 9¢ to 6¢ but that is of little consequence--he knows he's gotten in near the bottom and nobody hits the exact bottom anyway.
4. He loves his penny stock, but when he has a double, he sells half no matter what. And he's invariably happy in the end by his tactic.

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