Avoid so-called penny stocks to buy today that are highly speculative and you will stay out of some of the most-risky investments on the market
Investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative penny stocks.
Some get hooked on buying them, since low-quality stocks can be highly profitable over short periods. However, low-quality penny stocks to buy today can appear to be good bets—before going badly wrong
Are Penny Stocks Worth It?
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Canadian Penny Stock Guide: Find where to find Penny Stocks that pay well.
Do not let the shiny appeal of new penny stocks to buy today blind you to the risks. Look instead for well-established investments for your portfolio
At some time in their lives, many people feel a near-automatic attraction to things that are new or different.
People get used to the idea that it’s good to try something new. They get used to the idea that you can largely take advertising claims and glowing reviews at face value. However, when assessing financial commitments, those same attitudes are dangerous.
The problem is that the risks in bad investments are subtle—far easier to overlook than, say, a tiger’s snarl. That’s especially true of highly aggressive investments. Sometimes, the story is so good that success seems guaranteed, if you just hold on long enough.
For instance, investors may ask if a particular new stock issue or unproven tech stock or penny mine is a good choice for an RRSP. We explain that these investments are too risky for an RRSP. Some reply, “I don’t mind the high risk, because I plan to hold for the long term.”
They have it backwards. Well-established companies with a history of sales and profits, if not dividends, are your best choice for long-term investment success. They tend to survive the bad times and go on to thrive anew when good times return, as they inevitably do. You put the odds in your favour even more if you use our three-part strategy to build a portfolio of well-established companies.
Pay attention to these two reasons to be wary of penny stocks to buy today
First, penny stock promoters aim to make companies seem bigger than they appear. For example, when the company gets a deal with a major, however indirect, promoters go to great lengths to make it seem bigger than it really is. Instead of announcing that the big company has invested, say, $50,000, penny stock promoters may issue a press release that says the two companies have entered into a “multi-stage development plan.” The release may say the major has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or an online link for investors who wish to order the enticing brochures.
Second, bad penny stocks require the most intensive marketing and promotion. As mentioned, penny stock promoters love to make deals with major, well-known firms. These deals are aimed at gaining the trust of investors—stock investors are far more likely to buy penny mining stocks that have agreements with companies like Barrick Gold, Teck Resources or some other major mining company to finance exploration of their mining claims.
This isn’t limited to just penny mining stocks. All penny stocks hope to gain the trust of investors. For example, a penny stock may issue a press release about how Sony, Apple or some other household-name multinational has agreed to sign them up as a “channel partner” to potentially co-market a computer program or electronic gadget. The penny stock hopes that the link with a major brand will provide instant credibility, even if it far from guarantees any sales or profits.
Discover how to make the best buy/sell/hold decisions on penny stocks to buy today
In general we avoid penny stocks that promote themselves too aggressively (or do so misleadingly). Here are some tips we consider when we analyze penny stocks for aggressive investors.
We want to see experienced management with a proven ability to develop and finance a company.
We look at environmental constraints when considering mining penny stocks in particular. When we recommend junior stocks exploring for minerals, we prefer those that operate in an area with a geology similar to that of nearby producing mines.
We think you should avoid stocks that trade over the counter, where such things as regulatory reporting are lax.
We also like to see a sound balance sheet in all the penny stocks we recommend. We like to see enough cash to keep operations going without the need for dilutive share issues at low prices.
While you’re looking at the balance sheet you might also want to see if there are any hidden assets like real estate at historical prices. That often fails to capture the current market value of that real estate or its development potential.
Use our three-part Successful Investment approach to make better investment decisions
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
How are you able to spot penny stock manipulation or marketing gimmicks before investing?
Learn everything you need to know in 'Buried Treasure: Canada's Penny Stock Guide' FREE Special Report from The Successful Investor.
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