Penny Stock Investing
What's all this about investing in penny stocks?
People have heard of penny stock fortunes being made overnight. It's rare, but it can and does happen. Penny stocks can be great investments. On the other hand, you can also lose a lot of money fast if you're not careful. It's considered to be a risky field, compared with the higher-priced issues. The underlying companies are usually startups and smaller companies with limited resources (think two or three guys in a small office in a business park somewhere). Statistically, if you were to invest in a bunch of penny stocks at random, most of them would be losers.
But, a few of them would be spectacular winners. These are the penny stocks to focus on. The trick is to put the odds in your favor. Dead-accurate analysis is required, from either a technical standpoint involving price and volume patterns, support, and resistance and the like, or from a fundamental standpoint, i.e., understanding the companies and what they do, and their balance sheets. Most investors probably use a combination of analysis techniques. Our favorite analysis tool is the Gigascanner stock market scanner, which focuses mainly on technical action, but also pulls in the fundamental data in the form of an EPS (Earnings Per Share) ranking.
A steadfast, single-minded focus is required, with constant vigilance, especially anytime there's market exposure - otherwise you could loose a lot really fast. There's no such thing as a "safe" stock, especially in this price range. You can't let emotional issues such as your "attachment" to money, or the fear of loss, or basic greed affect trading decisions.
Also, you can't afford to get distracted or be influenced by outside factors such as the day-to-day financial news, or some expert's opinion. Make rigorous use of stop orders to prevent catastrophic damage. Don't watch CNBC, and don't watch live quotes. These things are brought to you courtesy of the stock brokerage industry, not to mention Wall Street at-large, and the entire financial sector, mainly serving to spread confusion and uncertainty, fan the flames of emotion, and thereby create ever more order flow.
There are various definitions of a penny stock out there. The SEC considers anything under $5.00 to be a penny stock. Personally I consider stocks in the 1 - 10 dollar range to be penny stocks. Our free stock screening tool works well with stocks in this range. When you're looking at "actual" penny stocks, costing less than one dollar per share, the odds are that you're prospecting in the mine field. Stocks this cheap are excessively risky, so much so that the penny stock brokers will charge typically an extra half percent or more on top of the base commission.
A prudent account manager or advisor seeking to manage risk in a meaningful way would skip penny stocks altogether (hedge funds notwithstanding), or if the client is willing to gamble they might allocate just a small percentage of the portfolio to penny stocks.The remainder of the account should probably be diversified between higher-quality growth stocks, and larger market-cap dividend-bearing stocks, for best results.