When Buying Penny Stocks Is Not A Good Idea.
Many people want to trade in the stock market but they don’t have a lot of cash to do so. They talk to other people like themselves who are doing it. They are told that the best way to start is to buy penny stocks. That can’t be any further from the truth. Yes they can make big profits, but they can also lose a lot of their hard earned money playing in the stock market that way.
When you want to start buying stocks I suggest you look at ETF’s (Exchanged Traded Fund) and Mutual Funds. There are costs to each of them. You need to do your due diligence in looking for the right one. If your are starting out with less than $50,000, ETF’s and Mutual Funds are the way to go.
Buying penny stocks is what people who are uneducated in the stock market do. Don’t get me wrong, many people become very rich trading penny stocks. You hear it all the time, but what you don’t hear is that many more lose money playing it this way.
There are great companies that are on the rise in their industry, but not many. For every ten companies that are started, nine out those ten fail. Out of the ones that make it far enough to be traded on the OTCBB (over-the-counter bulletin board), at least 30% never make it past their initial public offering price.
You need to do research on the companies that you want to invest in. Learn to read financial statements, balance sheets and listen to conference calls on their earnings reports. Typically you need to do 5-8 hours of research for each company you are looking to invest in. After you buy into a company you will need to do at least one hour each week on each company. Do what I like to refer to as doing you due diligence, will end up saving you a lot of headaches later on.
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Example of Buying Penny Stocks
When a person is considering buying penny stocks they’re looking for low price stocks that they can buy a large amount of. They also are looking for small companies that are on the verge of “breaking out”. Whatever the reason, there needs to be a understanding of the risks that are involved.
Buying penny stocks can be very rewarding or quite damaging to your portfolio. Research must be done to minimize the risks and increase the gains. You must look into the company’s history to see their growth in the sector that they are in. Most companies that are considered a penny stock (valued less than $5.00) are in technologies, biotech, and alternative energies. There are few that are in the other sectors like GameZnFlix (OTCBB: GMFX) which is traded on the OTCBB (over-the-counter bulletin board). The company is in the business of entertainment. Like Blockbuster and Netflix, they have an on-line video and games rental program.
The reason I speak of them is that in buying penny stocks if you don’t look at the company’s fundamentals you can lose a lot of money. You don’t have to go too far in the history, just enough to get the idea of what the risks are. In September, 2007 the company went ahead and offered a reverse-split for the outstanding stocks. For every ten shares that you owned they gave you one. They value was adjusted to be worth the same so you didn’t lose the value of the holdings. The new price was $0.10 a share. At that price you can buy 5000 shares totaling just $500. If the stock doubled (which is not hard for most stocks to do at this price range), you would make $500 on a $500 investment (a return of 100%). Unfortunately the company’s fundamentals were not in order as well as a positive revenue and the share price went down. Needless to say that the value of the stock has fallen to an all time low of $0.0001, which now makes the value of your holdings $0.50 (yes, that is 50 cents.)
At this point and you were to purchase 500,000 shares at $0.0001 it would cost you only $50. If this company was to turn it around (which I don’t expect) and the stock price went up to $0.10 the penny stock investment value of your portfolio would be worth $50,000 (a return of 1000%)
When you are buying penny stocks you need to know what the company is doing to grow. If you don’t, you risks may be more than you willing to take.
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