Penny stock advice for investors playing with money they’re willing to lose

Investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative Canadian penny stocks.

Straight-talk on penny stock advice: Canadian penny stocks can be riskier than other investments and early success can (paradoxically) actually lead to a big loss.

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.

When you buy penny stocks 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.

Take our penny stock advice: The longer you play, the likelier you are to lose

If you lose money in speculative pennies or other low-quality stocks (or ETFs that invest in low-quality stocks), 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.

The reality is that it’s easier to launch a promising company than to create a successful business. That’s why only a minority of penny stocks ever go on to significant success. And while penny stocks can be a worthwhile addition to the aggressive portion of a diversified portfolio, you should in general only buy them with money you’re willing to lose.

Take our penny stock advice: Low-quality Canadian penny stocks are quick to fall when a bubble bursts

A decade and a half ago, buyers of Internet start-ups made far more profit than investors who stuck with well-established companies. The same thing happened when many investors bought low-quality resource stocks in 2007 and 2008, and it has happened in the past in penny stock bubbles. When the bubble bursts, however, prices of low-quality stocks inevitably come crashing down. After all, it’s much easier to launch a stock promotion than it is to create a successful, lasting business.

Take our penny stock advice: Canadian penny stock promoters aim to make companies seem bigger than they appear

Penny stock promoters love to make deals—however minor or indirect—with major, household name companies. 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. 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.

The only way to minimize the risks of predicting the future of an investment in penny stocks

The best way to make money with penny stocks is to look for these criteria: If you’re investing in penny mining stocks, look for experienced management with a proven ability to develop and finance a mine.

Also when investing in penny mining stocks, look at environmental constraints in places where junior mines are exploring for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections.

And when we recommend junior miners that explore for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.

Make Canadian penny stocks a small portion of your portfolio, if that

Ultimately, Canadian penny stocks should always be a small part of any diversified portfolio. You should only buy the most speculative of them with money you can afford to lose.

Leave us a comment below and tell us your most interesting penny stock advice that caused your portfolio to either flop or grow.