Penny Stocks

[robby]

I have a question about penny stocks (lots of questions today) - are they all scams or are there legitimate ways to invest in them. My email gets filled with penny stock picks and I hear that most of these are run and dump operations. Is that true? How do I go about researching penny stocks more or is it even worth my time?

[34saving]

The vast majority of the ones you'll hear about are pump and dump. They're probably not worth your time unless you have A LOT of time (researching penny stocks is a PAIN) and have a very high risk tolerance. That being said, lots of people have made lots of money. (Of course lots of people have LOST lots of money too.) The only penny stocks I've seriously looked at were companies owned by (same management at least) or about to be aquired by companies I already owned. Of the 5 or so I've reseached I bought one. Made about 30% in the aquisition.

It should be pointed out that trading penny stocks is tough too. (Many have practically no volume and trade on weird exchanges that your brokerage may or may not be friendly toward.)

[poundwise]

Here is a very detailed article on the subject that you may find interesting...

The Lowdown On Penny Stocks

[Crystallas]

They arent diffrent from other stock. Just cheaper. You need to research these companies as much as you research any investment, regardless of how cheap it is. I've been bouncing on ELC for the last month, and Ive made out okay with it. Average buy in at 0.18, then selling at 0.22 every other day. But I also like this company a lot because they have a very low chance of failing due to their modules. So one plus about a penny stock is that you can buy a cheap stock at x amount of shares, then see it raise an incredible amount.

As said about those that are being emailed to you, and a majority of them, they are being pumped 95 times out of 100.

But it is a nice risk, because you can spend $1000 on a $.03 stock, then it increases to $0.30ish and sell. Youre returns off just one of these stocks can cover your losses on other risks(assuming that you are confidant on your research.)

[poundwise]

Originally Posted by Crystallas

They arent diffrent from other stock. Just cheaper.

I have no strong feeling one way or another re: penny stocks, however, this statement is simply not accurate. As pointed out by the article I linked, penny stocks differ from other stocks in at least four significant ways:

Lack of Information Available to the Public
One thing we always preach is that the key to any successful investment strategy is acquiring enough tangible information to make informed decisions. For micro-cap stocks, information is much more difficult to find. Companies listed on the pink sheets are not required to file with the SEC and are thus not as publicly scrutinized or regulated as the stocks represented on the NYSE and the Nasdaq exchanges; furthermore, much of the information available about micro-cap stocks is typically not from a credible source.

No Minimum Standards
Stocks on the OTCBB and Pink Sheets do not have to fulfill minimum standard requirements to remain on the exchange. (Read more about these requirements here.) Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on one of the major exchanges, the company moves one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the Pink Sheets has no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies.

Lack of History
Many of the companies considered to be micro-cap stocks are either newly formed or approaching bankruptcy. These companies will generally have a poor track record or none at all. As you can imagine, the lack of histories of companies only magnifies the difficulty in picking the right stock.

Liquidity
When stocks don't have much liquidity, two problems arise: first, there is the possibility that the stock you purchased cannot be sold. If there is a low level of liquidity, it may be hard to find a buyer for a particular stock, and you may be required to lower your price until it is considered attractive by another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate stock prices, which is done in many different ways - the easiest is to buy large amounts of stock, hype it up and then sell it after other investors find it attractive (also known as pump and dump).

[markio26]

i never buy penny stocks.. i always buy stocks priced $10 or more and they have to be industry leaders, take over targets, by a big industry leader... i have friends who win and mostly lose $5000 at a time... but, they can write it off their taxes.. they p-ss money.....

[Ima saver]

I have never bought penny stocks either! Don't think I ever will.

[shengmei]

I am looking into buying some penny stocks, but I have always believed that penny stocks are a long-term investment. You have to hold on to the stocks for several years in order to make a tidy profit. It takes a long time to make money with penny stocks.

[PRICEPLUS]

If you are a gambler then indulge. I personally see them as too risky!

[Crystallas]

Originally Posted by poundwise

I have no strong feeling one way or another re: penny stocks, however, this statement is simply not accurate.

I completely agree about why they are diffrent. Because the methods of researching a stock with little track record will allways require a form of research that is customized to that company. You can't just look in websites to get your research, you need to go old school, call some of these companies that are appealing to you and find out more about their plans. Some of these companies will even mail you information, or point you to better sources.
But I still think they are in the same boat as any stock from my point of view because I personally over-research. Sometimes when I make comments like that, I forget that a lot of people look at yahoo finance's or WSJ's of the world and use that to dictate their entire decision.