Learn how to get started investing in penny stocks with our seven steps—plus avoid the highest-risk pennies and potential minefields like online trading
Knowing how to get started investing in penny stocks leads to better buying decisions. Penny stocks tend to be more speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology, or launching new software. Those types of focuses come with higher risks.
Penny stock bubbles have from time to time helped investors make big profits; however, when the bubble bursts, prices of low-quality stocks inevitably come crashing down. After all, it’s much easier to launch a stock promotion that plays into that bubble than it is to create a successful, lasting business.
Are Penny Stocks Worth It?
Learn everything you need to know in 'Canada's Penny Stock Guide' for FREE from The Successful Investor.
Canadian Penny Stock Guide: Find where to find Penny Stocks that pay well.
Buy penny stocks as a small part of your investments, if that, to keep from losing money
In general, penny stocks have lower trading volumes, or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news may cause a penny stock’s price to rise or fall.
Ultimately, penny stocks should only be a small part, if any, of a Successful Investor diversified portfolio. In fact, you should only buy the most speculative of them with money you can afford to lose.
Always consider our three-part Successful Investor approach while buying stocks, including penny stocks:
Invest mainly in well-established, dividend-paying companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Understand the risky appeal of the “ground floor” when you consider how to get started investing in penny stocks
Penny stocks have appeal for some aggressive investors who aim to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.
These investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor or start-up stage. Sometimes stocks with seemingly intriguing business concepts just never get anywhere. They generate a number of encouraging news releases, but these releases turn out to be a series of exaggerations and broken promises.
Promising stocks may start out with a brilliant idea or a plan to get involved in a high-profile or fast-growing business area. They may enjoy an initial burst of sales or even earnings. But many just can’t keep up the momentum. They never reach the critical mass they need to achieve consistent profitability.
Investors in start-up companies also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of junior companies ever go on to significant success.
We consider the majority of penny stocks to be gambles, but we do have some tips for making money with them if you decide to invest in them.
Learn how to get started investing in penny stocks by looking for these main factors:
We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
We like to see a strong balance sheet with manageable debt. Even better, we like to see a major partner who can finance the mine, software and so on to production.
We want to see experienced management with proven ability to develop and finance a new business.
We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
We compare the market cap of the stock with the estimated value of its mineral reserves, future product sales and so on. Some pennies need to find a mine, or successfully market a lot of their software, or other products, to justify the current share price and avoid collapse.
Be aware that penny stock trading online can lead investors into dangerous territory
Frequent trading can lead you to buy lower-quality, thinly traded stocks. The danger arises from the fact that the bid and ask spreads of many of these investments can be so wide that the share price will have to go up significantly before you’ll even begin to make money on a sale.
You can make trades quickly in online trading, and that cuts your commission costs. However, for successful investors, this is a bonus, not the object of trading stocks.
It is far more important to follow the Successful Investor approach and focus on high-quality, well-established companies and how they fit into your portfolio. The longer you typically hold these stocks, the greater the chance that your returns will improve as well.
If you hold penny stocks in your portfolio, how did you decide which ones to invest in?
Learn everything you need to know in 'Buried Treasure: Canada's Penny Stock Guide' FREE Special Report from The Successful Investor.
Canadian Penny Stock Guide:
Find where to find Penny Stocks that pay well.
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Buried Treasure: Canada's Penny Stock Guide
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