According to a U.S. Securities and Exchange Commission warning, “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.” It’s probably justified. There’s no doubt that true penny stocks are among the surest ways to lose all your money in the stock market.
But, that being the case, why do so many investors love penny stocks? If you type “penny stocks” into Google it spits out more than 8.5-million hits. If you do the same for “blue-chip stocks” you get about half that number and if you type in “dividend-paying stocks” you get about half that again.
The folks at Fool.com reckon it’s because “the world of pennies is inhabited by hardworking average Joes hoping to strike it rich, pumpers and dumpers, hypesters and scammers. In pennies, the logic and reason that applies in the rest of daily life is replaced by zeal and prayer.”
But there may be another reason. And that is that the rest of the stock market can be so utterly boring. Let’s face it, unless you’ve got huge amounts of money on the line, how excited can you get when one of your blue chips has a really big day and moves up 1.5%? A penny stock can easily double in price in a matter of days. What are the chances of an Anglo [Nasdaq:AAUK] or a Billiton [NYSE:BHP] doing that in a couple of years?
And, while it must be said that buying some penny stocks may be more akin to picking up a lotto ticket on the way home from work than making a rational investment decision, that’s not to say that you shouldn’t go looking for big returns from a penny stock with a reasonable amount of cash, no debt and a CEO – or better still, a CEO/founder – who has a substantial ownership in the business.
Yes, they are the exception. And, yes, of course, they are hard to find. But the point is this: provided you’re willing to put in the effort and you understand that this is a high-risk area that certainly isn’t going to suit everyone – in other words, that you fully understand what you’re getting into – you shouldn’t let anyone dissuade you from buying a penny stock simply because it is a penny stock.
The thing to remember is not to take a chance on something you don’t understand.