Hot Canadian penny stocks may seem appealing, but there may be significant issues behind the investment
Hot Canadian penny stocks do sometimes pay off, but there are many pitfalls to avoid.
When you buy hot Canadian penny stocks, or penny stocks, in general, you could have a big payday if you make the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.
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Hot Canadian penny stocks can be riskier than other investments
Investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative Canadian penny stocks.
However, there are several potential risks when investors venture into hot penny stocks.
Buying low-quality Canadian penny stocks is one of those things that can appear to be successful before it goes badly wrong. Some get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.
Avoid well executed marketing campaigns masquerading as hot Canadian penny stocks
Penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and other paid sponsorships.
There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but bad for investors looking for an unbiased opinion on a stock.
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 give them instant credibility, even if it far from guarantees any sales or profits.
Not all penny stocks and their promoters are out to cheat investors. But it’s important to approach any penny stock with a healthy dose of skepticism.
7 tips for making money with hot Canadian penny stocks
Penny stocks do sometimes pay off. There are many pitfalls to avoid. You should be aware that many penny-stocks are little more than very well executed marketing campaigns. Below are 7 tips that you can used when investing in penny stocks if you want to diversify your portfolio and avoid the biggest risks.
Look for well-financed companies: To profit in penny stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
Look for a strong balance sheet: High-quality penny stocks should have strong balance sheets with low debt. It’s even better if they have a major partner who can finance the penny stock’s product to market or mine into production.
Look for stocks trading on an exchange: We think you should avoid stocks trading “over-the-counter,” where such things as regulatory reporting are lax. Stick to penny stocks trading in regulated exchanges such as the Toronto and New York stock exchanges.
Look for strong management: Look for an experienced management team with a proven ability to develop and finance a mine, product or service.
Look for reasonable share prices: Compare the market caps (The total dollar value of all of a company’s outstanding shares) of the stocks with the estimated value of their assets or future earnings streams. Only a few penny stocks will successfully launch a product with enough success to justify the current share price and avoid collapse.
Look for a focused company: Above all, you should automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on developing a saleable product or service, rather than hyping their story.
Look past the hype: We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
Should hot Canadian penny stocks be part of your portfolio?
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 will cause a penny stock’s price to rise or fall.
Ultimately, Canadian penny stocks should always be a small part of any diversified portfolio. You should only buy them with money you can afford to lose.
If you stick with top-quality dividend stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.
Above all, note that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.
All in all, good dividend stocks are a valuable component of any sound Successful Investor investment portfolio.
How do you feel about hot Canadian penny stocks? Are you currently holding any? Share your experience with us in the comments.
This article was originally published in 2017 and is regularly updated.
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