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Investing Wisely in Penny Stocks

Updated on November 3, 2011

Penny Stocks

1. Q&A short answers - You can now answer questions with a short answer and that is exactly what I am going to do in this answer.

Investing in penny stocks should not be for everybody. Please bear in mind that penny stocks have prices ranging from about $0 to $5. When you buy the penny stocks you do it on over the counter (OTC) and no well established stock broker is willing to touch penny stocks. Neither are the banks willing to give you a margin through your stock broker to buy the penny stocks on margin. This is in itself sufficient reason to alert you that penny stocks are very risky just like stock options.

If you buy penny stocks, you should look to invest in companies whose future look bright. But this is according to you and you are likely to be wrong.

Let's look at an example. A company X is offering penny stock shares at a price of $0.001 per share. If you buy one million shares you will have spent $1000. What do you notice here in your inner self? You are a proud owner of a million shares in a company. That's sound good. If you look at it that you are owner of shares worth $1000, then you are likely to get frustrated.

But the biggest problem with penny stocks has more to do with bid - ask slippage. If you pay $0.001 for each share and next month you look at the prices and the bid/ask prices will be 0.0008/0.0015 - this is the time you will realize that the biggest problem with penny stocks is to find enough buyers at the right prices when you want to exit the market. That being the case, the best thing to do is to hold them for a very long time hoping that your company will grow big and that your penny stocks will then be priced at say $10. If you are lucky to do that, then you will certainly have made a killing. You will now be a rich man or woman. However, you have to realize that only one out of every ten companies that issue penny stocks will proceed to success.

The other negative thing to do with penny stocks is that you can not be able to do charts analysis like you do on regular stocks and that is a big drawback. Getting quotes on penny stocks is also a problem.

I would recommend you avoid penny stocks but you should proceed and invest in strong companies with regular stocks. Why not invest in Microsoft? If you are currently looking for penny stocks to invest in please go and look at those companies trying to invest in China on a technology called Broadband modems and internet in second and third world countries.

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    • profile image

      AJ Honeylake 6 years ago

      Ironic thing about this article: Microsoft began as a penny stock, trading as low as $0.32 cents a share.

    • profile image

      Cheap Penny Stocks 8 years ago

      I might also add, that 95% is being VERY optimistic. In my experience it has been far closer to 98 to 99%. Finding winning penny stocks is very difficult to do and low volume can trap many would be investors.

    • profile image

      Cheap Penny Stocks 8 years ago

      wholeheartedly agree. Penny stocks aren't for everyone and just like any form of 'trading' or 'investing', it takes a large amount of education and experience. Both of which cost more to obtain that most people are willing to suffer through.

    • profile image

      Peter Leeds 8 years ago

      Well written article, and I agree with most of it. 95% of penny stocks are bad investment ideas, but when you find the 5% that have good management teams, ballooning market share, and growing earnings, they can be very lucrative. Never trade penny stocks unless you start by paper trading (don't use real money but rather keep track on paper until you get the hang of it). Read more in my free online book at about paper trading and how to protect yourself when trading penny stock.

      Best wishes,

      Peter Leeds

      The Penny Stock Professional

    • Maniadorendimento profile image

      Maniadorendimento 8 years ago

      I found out about penny stocks today.

      Recently I read that is better to buy a good company stocks at reasonable price than a bad company at a low price. I couldn't agree more.

    • loua profile image

      loua 8 years ago from Elsewhere, visiting Earth ~ the segregated community planet

      Good advise... Thanks..

    • profile image

      List of Penny Stocks 8 years ago

      Yeah penny stocks are for trading only. There are a few that you could invest in, but very few long term.

    • traderkenny profile image

      traderkenny 8 years ago

      you right LennyP....up to now, I don't buy any Penny stocks.

    • LennyP profile image

      LennyP 8 years ago from Iowa

      Buying penny stocks as a long term investment is rarely ever a good idea. They are usually valued so low for a very good reason. In very rare cases you may have good reason to believe that they can turn things around but 99.9% of the time they are for a quick trade based on a catalyst you predicted.