Why Penny Stocks Are A Bad Investment
14 August 2006Many new investors will at some point find themselves drawn to penny stocks, which are stocks that trade for very low amounts (pennies) per share in companies that are only worth a couple million dollars. HJL Money Blog has a good post on why they aren’t really good investments. People tend to think they can make a lot of money very quickly because even small changes in price can double or triple your investment. The downside, as HJL points out, is that they’re very risky, often are bad companies to invest in, and there are so few buyers and sellers that you may not be able to sell all your stock even if the price rises.
I made a little foray into penny stocks myself in college when I was first learning about investing. I think I still own the stock I bought. It was in a tiny little software company on the advice of some friends, and I put in $100, only to watch it become worthless in a month or so. I’d suggest starting with small amounts of money yourself if you want to learn from the school of hard knocks. If you’re a wizard and double your $100, then you can keep the money in penny stocks. Just don’t put in any more - you’re gambling, and if you decide to keep throwing in more money, you’re bound to lose in the long run. If you’re the next Warren Buffett, then you can tell people how you made all your money starting with $100. My guess is you’ll just be out the $100.
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