Are penny stocks worth investing in? Is there a good strategy to doing so? Do you have personal experience?

Question

I'm a novice in regards to investing. So I assume "penny stocks" refer to very low cost stocks. However, I wonder, what is the strategy and purpose for investing in them? Besides hitting the stock-market jackpot by investing heavily in a penny stock that goes huge in terms of value, what are the more reasonable strategies to using them and putting your money into them?

Also, is there an institution / news investment orginazation that covers penny stocks well?

Answer 1

The risk to return ration for penny stocks is way to high.  It just isn't worth it unless you enjoy gambling.  I don't.

Answer 2

Hi, Pea Patch,

I do have experience with penny stocks. Unfortunately :)

Let me tell you this -- maybe you think that stocks priced at 1 penny can't go any cheaper. Wrong, bucko. Stocks can go below a penny. No matter how low a stock's price is when you buy it, it can always go lower. It can also go to zero.

And yes it seems like they can go up faster than regular stocks, because a penny rise doubles their price -- but you won't get that penny rise unless somebody is actually buying it.  

And the price can drop even faster than it rises. It's very hard to know when a penny stock is going to keep rising in price, or whether it's reached its peak. Yet, if you miss that big move, there goes all the money you thought you'd make, right down the toilet.

Penny stocks belong to businesess so small and uncertain that they're risky to buy even if you have (illegal) inside information that they have great prospects. You could still lose money. All the "insiders" in the world can't predict the future. And many companies that look great today will be out of business tomorrow.

Also, penny stocks are vulnerable to illegal pump and dump tactics, where somebody buys the stock, then talks it up anonymously in Internet chat rooms, and gets the price to go up for no fundamental reason. They sell, and then you're left holding the bag.

By now, you must realize that penny stocks are not a game for ordinary investors to play.

best, Rick Stooker

Answer 3

I've really wondered this, too.

I think the attraction is just that a small change in the price is a big change, percent-wise.  For instance, if a stock goes from $20 to $20.01 that's only a what, 0.05 percent gain.  But if a stock goes from $0.10 to $0.11, that's a 10 percent gain.  In theory, if you had invested $1000 in the first stock, now it'd be worth $1005.  But if you had invested $1000 in the second stock, now it'd be worth $1100.

Of course, it could go down by that amount just as easily as it could go up.

As far as strategy...I've usually been too scared to try, but I suppose if you spread your money across a bunch of them, and watched them like a hawk, you could cash out on the peaks and buy in the valleys just like any other stock, but on perhaps a shorter timescale.

Answer 4

Ive been a day trader for about 5 years now. I quit my job at Cisco to do this and learned other ways to make money on the internet with all my spare time. If you are into investing, I suggest you look at domain names. Check out Sedo or TDNAM for that. As far as penny stocks, its exactly like what you said "stock market jackpot". Penny stocks are anything under $1.00 per share but Im sure theres people would disagree with me on that. The main purpose of trading with penny stocks is either to put alot of money down on one stock and hold it hoping it will do great (very few ever do), or to day trade it by buying it low and selling it later in the day or the next day at a high. I have done this successfully many times, but the only time I ever took a loss larger than $50 was on a penny stock so I stopped (I lost about $500 that day). Penny stocks are very risky because the companies behind them are usually not very "sound" companies, meaning they can crumble at any time. Its good and bad because the slighest fluctuation can make you alot of money, but also make you lose alot of money. Penny stocks fluctuate easier because it only takes 1 big investor to make it drop or rise. I personally stick to stocks within the $5-25 range. With penny stocks, I would trade between cents..meaning...I would buy a stock at .12 cents a share and then sell it once it hit .124 or .125 (half a cent). I would "watch my stocks" like a hawk, but the problem with penny stocks and why I lost on it was because they are not as popular as regular stocks. So you dont always have a buyer. My stock would hit a higher price, and I'd be wanting to sell it (and have an order to sell it at that price), but nobody would buy it and within a few minutes it would drop back down.