Penny stocks on the rise can offer you a big payday but the odds against success are very high.

Penny stocks can be more easily manipulated than most stocks that trade on exchanges because of their generally low trading levels and resulting price volatility. Combine this with a lack of regulatory oversight on some stock exchanges, and the fact that these companies are easy to launch, and you can appreciate why investment frauds are more common with penny stocks.

Jumping into penny stocks on the rise needs to be approached with a lot of caution.

Keep your investments in penny stocks on the rise to a minimum—if at all

When you buy penny stocks you could have a big payday but the odds against success are high.

In general, penny stocks have lower trading volumes or liquidity, which means it may be more difficult to sell a stock when you want to. These stocks also suffer from large price fluctuations, so any bit of news will cause a penny stock’s price to rise or fall.

Ultimately, penny stocks should never be more than a small part of any diversified Successful Investor portfolio. But in general, you should only buy them with money you can afford to lose.

Penny stocks on the rise in your portfolio versus high-quality stocks

For the bulk of your portfolio, you can put the odds in your favour by following the three simple rules of our Successful Investor philosophy: Invest mainly in well-established companies, spread your money across most if not all of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities), and avoid or downplay stocks in the broker/media limelight.

Unlike with penny stocks, this puts time in your favour. The longer you stay invested in high quality stocks, the more likely you are to come out ahead.

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Are penny stocks on the rise in the marijuana industry worth buying?

As you probably know, Canada and several U.S. states have legalized or decriminalized marijuana use.

This change in the law has led to a shift in current and future marijuana production, from the underground economy to the legal economy, where it can be regulated, taxed and invested in.

While some of the larger cannabis producers have investment prospects worth looking into, we advise staying out of pure stock promotions of marijuana businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. 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.

Be wary of penny stocks on the rise in the technology industry

It may seem contradictory to use the terms “investment quality” and “penny stocks” in the same sentence. However, there are even wider disparities in the investment quality of penny stocks than in more-established companies that meet our Successful Investor criteria. That’s because, while it’s hard for any new company to grow into a profitable business, it’s even harder in pioneering fields, where most penny stocks operate.

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.

Here are four risk factors inherent in investing in tech penny stocks on the rise:

• High-tech shams are common: It’s easier to set up a company and sell stock to investors than to perfect a technological breakthrough. Be especially wary when tech penny stocks splurge on elaborate websites and glossy investor brochures.
• Marketing is as hard as inventing: Even a great new product or computer programs may fail to overcome the skepticism of retailers and consumers.
• Major tech penny stock investors also make mistakes: Tech penny stocks often trumpet their deals with major firms such as Apple or IBM. And it’s true that Apple and IBM have much more knowledge and bargaining clout than any individual investor. But they still invest in penny stocks with products that fail.
• Acquisitions can bring “time-bomb” risk: Companies sometimes grow quickly by buying other companies. But it may also be the case that those selling the companies simply want to bail out of a losing situation.

Take note of our sell-half rule if you choose to invest in penny stocks on the rise

Selling half your holdings after you double your gains 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.

For penny stocks, what industry do you invest in the most?

Have you had any luck with penny stocks in the tech industry? What was your strategy for picking them?