Topic: Penny Stocks

Finding cheap Canadian penny stocks is easy—but spotting ones with bright futures is a lot harder

Invest in cheap Canadian penny stocks only with money you are willing to take on a lot of risk with. Learn more about reasons to avoid most of these stocks in this article now

Penny stock bubbles have helped investors profit—however, when the bubble bursts, prices of low-quality stocks inevitably come crashing down.

Cheap Canadian 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.

Are Penny Stocks Worth It?

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Cheap Canadian penny stocks and long-term investing is not a profitable mix 

Although the low price may seem right, the average penny offers a poor long-term return. After all, it’s hard to create a successful business. But it’s much easier and cheaper to set up a company and sell stock to the public. That’s why bad penny stocks always outnumber good ones.

Investing in cheap Canadian penny stocks over time will lead to greater losses the longer you hold them

If you lose money in speculative pennies, you may think your main mistake was bad timing. That’s a misconception. All penny stocks rely on luck to become wildly profitable. If you play long enough, the “house odds” eventually triumph over any run of luck.

In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.

That’s also why we think you should apply our sell-half rule.

Selling half your holdings after you double your earnings is a good strategy for any high-risk investment, but especially so for penny stocks.

This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly. 

Watch out for promoters of cheap Canadian penny stocks that make companies seem bigger than they appear

Canadian penny stock promoters love to make deals with major, household name companies. They find it far, far easier to sell stock to the public if Barrick Gold, BHP or some other major mining company has agreed to finance exploration of their mining claims, or if Apple or Intel or some other household-name multinational has agreed to evaluate their revolutionary software or “cloud” application.

The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

When they get a deal with a major, promoters go to great lengths to make it seem bigger than it 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.

In fact, when a penny stock shoots up on the news of big-company involvement, and the property/program/revolutionary software is still in the early stages of development, it’s often a good time to sell.

Investing in cheap Canadian penny stocks focused on marijuana can be costly

We advise staying out of stock promotions for highly speculative Canadian marijuana penny stocks or similar promotions for anything else. They attract the wrong kind of people. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” investing stock scam almost seems like an MBA-style case study on how to launch one of these frauds online. To avoid being taken in, it pays to read more, and to think before you invest. This includes start-up or speculative marijuana stocks. 

Use our three-part Successful Investor approach to make better investments—including deciding if you should invest in cheap Canadian penny stocks 

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight. 

Penny stocks have gained a lot of attention over the past year, leading to more opportunities for swindlers. How do you protect yourself against this?

What is your experience with penny stocks? Have you found any to be profitable?

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