An acquaintance told me that he has a friend who made a fortune from Penny stock investment. This friend did it by riding some crazy penny stock rally and got a huge investment return.
That is how I got to know Penny stock investment. Penny stock is very attractive for a couple of reasons.
PENNY STOCK INVESTMENT: REASON ONE
The first reason why penny stock investment is attractive to a lot of new investors is that they are cheap.
For a new investor with couple thousand dollars, it is tough to make a decent return on stocks that you can’t pick up in volume. As of writing, you can get two shares of Alphabet with some change left to cover brokerage fees. This two shares of Google is not going to make you much money. If you are lucky, you will make enough to cover the brokerage fees.
So like any trade, a new investor naturally start to look at stocks that they can own sufficient amount with the capital that they have. A universal conclusion is that the more shares you can get the higher return potential.
With this finding, almost every new investor inevitably stumbles upon the penny stock market.
PENNY STOCK INVESTMENT: REASON TWO
The second reason why penny stock investment is appealing to new investors is that they have high yields. Some yielding more than 500% in one day! Imagine catching on that bandwagon.
Quick and high return will strike home for most new investors at this point.
PENNY STOCK INVESTMENT: EXPERIENCE
If you can agree with most of what I said above, then I feel confident sharing with you that me too. In the earlier days of my trading career, I had couple thousand dollars, read some internet articles, and bravely entered the Leonardo Dicaprio infested penny stock market.
I am not Leonardo Dicaprio. It didn’t take long for my what was suppose to be a 20k speedy return of assets turn into a worthless pile of digital junk.
So what happened? I did my research. I was diligent enough to convince myself that it was a sound decision. Many other traders from multiple different forums seem to agree and thought it was a great investment.
The chart told a story of the bull, but that bull stopped shortly after my investment, and it plunged into oblivion with little resistance.
Many years later I suspect I was a victim of a pump and dump. I thought there’s no way I could be the victim, but I was wrong.
The Penny stock market is less strict in its listing requirements compares to the bigger stock exchange. Therefore it is easier for questionable companies and characters to participate.
I’m going to make it entirely clear that Penny stock investing is profitable and lucrative, just that you are most likely not the one making it.
If you are not Leonardo Dicaprio in Wolf of Wall Street, then you are the Lamb of wall street.
PENNY STOCK INVESTMENT: YOUR CALL
My suggestion is that stay away from Penny stocks. A good way to identify that you are not in the right market is to see if there are any reputable companies. If you don’t recognize any name, chances are you are in a less regulated market.
I think that investors must not discriminate. It is absurd to judge a property strictly by the neighborhood it’s in. There are great companies that are temporarily in the Penny stock market, and that is the best opportunity for you to get in.
If you apply constant value investing principles, you can find the right stock cheap. If you don’t know what is value investing, then I recommend reading The Intelligent Investor by Benjamin Graham first.
After you read this book, you will be able to pick stocks better. However, I think you will not bother with penny stock investment anymore.
Not every company in the penny stock market is a bad company, but be diligent at businesses that are performing exceptionally well in a short period. A good indication of pump and dump.
PENNY STOCK INVESTMENT: SEARCH IN THE RIGHT PLACE
If your decision is to move forward with penny stock investment, then I recommend you be responsible for yourself and do a few things.
1. Call up the company you want to invest, talk to the CEO and ask yourself if you can trust this person with your money.
2. If you can, pay this company a visit in person. Check out their headquarter. Does it look like a functional company?
Visiting a company you want to invest is a reasonable thing to do for any investor. Warren Buffet does it all the time. If you are for whatever reason not allowed to visit, then they don’t deserve your money.
3. Find out what this company does, what do they produce, who do they sell it to, and what their client say about them. Call up their client and ask them openly of what they think about this company. Be open, tell them you are a potential investor, and you have doubts.
If you can’t find anyone that they do business with, or that their customer made you uncomfortable, then the both of them are most likely not worth of your time or money.
4. Always remember that the stock value of a company should reflect their actual value. A stock that is about to climb 500% in a day must be doing something spectacular. Find out what that is.
If you can’t find any information that justifies the rise, it is most likely a hoax.
5. Stay away from penny stock forums, or any stock forums if you ask me. It is one of the most toxic places for any sound investor to get tangled up. You won’t listen to street gossips why should you care about anything on a forum.
Always make decisions on your research and judgment. If the forum is such a good place for investors to get information then why are they not all filthy rich? Why are you on it is an even better question. You obviously are not a successful investor, considering that you are reading an article on penny stock investment.
6. Read books and not internet articles. If you want to become an investor, many good books will get you started on the right path and forge the right mental attitude.
7. Go to class, not those get rich quick trading seminars. Go to a college and drop in on economic classes. A comprehensive knowledge of the economy will help you make sound investment choices.
When it comes to researching on a stock, it is important to find information from the right places. I understand that when it comes to many penny stock companies, there is limited information on which you can base your assessment. To me, that is a good reason enough to stay away from a particular company.
Investing in a company stock is like a marriage. You won’t marry someone on a whim neither should you with a stock.
PENNY STOCK INVESTMENT: ALTERNATIVES
To find an alternative for penny stock investment, we must explore the things that attract in penny stocks.
1. Low capital requirement – As we discussed earlier, you don’t need a lot of money to start buying penny stocks.
2. High return – Penny stocks often promise lucrative returns.
3. Short term – Penny stock investment are not typical long-term investments. It is volatile in nature.
Understanding these key attributes, I would like to make a few alternative recommendations that I think is more beneficial for a new investor learning the trade, and potentially earn something from it.
These suggestions have their associated risk but overall a better environment than the penny stock market.
Option One: Value Investing
One alternative to penny stock investment is to research and review undervalued companies on the big stock exchange. Such as New York Exchange or Toronto Exchange.
During the oil crisis of last summer, many energy stocks plummet to near penny stock status. They have all since rebounded. If you got in at that time, you would have come out with a handsome return by now.
When it comes to investing in stocks, hindsight is always 20/20 and utterly useless. When the oil industry was tanking there were so much noise that prevents an investor from making sound decisions. Such is the case every day.
At one point or another, every investor asks themselves what kind of investors they want to be. The correct answer will always be value investing, but everyone gets there differently.
Option Two: Day Trading
If you are new to investing and you have limited start-up capital, you want to get a feel for how different investment works.
Day trading, for example, is a popular strategy for many traders. Day traders are swing traders or technical analysts. They understand the market and shares through chart and pattern analysis.
One thing to consider however is that you do require a bit more capital to day trade successfully. You need to be at least able to cover your brokerage fees.
Day trading requires sound knowledge in technical analysis. If you don’t even know the difference between a bar chart and Japanese Candlesticks, then you have some pre-requisite reading to go through.
Day trading is also risky, more so than value investing.
Option Three: Binary Options
The third option is something that I recommend for any future penny stock investors and day traders.
Binary Options is not new, although many promoters made it sound like a breakthrough trading platform. I’m not going to talk too much about that here, and I have written a discussion on Binary Options trading in this article.
All you need to know is that Binary brokers will allow you to buy or sell short-term. However, you do not buy or sell on the real market. Instead, you trade through the broker.
The benefit of this is that it allows you to make an investment on Google for example for a dollar, instead of $800 for the share.
You are participating in real markets at the real time, this form of options trading has a fixed investment return, anywhere from 60% to 100% depending on the firm and the asset.
Key Benefits of this Option:
1. You can start trading high rating assets in this option with as little as $20.
2. Practice day trading with demo accounts.
3. Plenty of high-quality tools and chart options to play with for free.
4. Trade stocks, Forex, and Commodities.
5. Real-time charts.
Types of Trading in this Option:
Short term Bull or Bear
This kind of trading is all about reading the pattern and making sound day trader judgment.
This sort of trading is to judge whether an asset can reach a certain level in a given amount of time, and make the right calls in time.
I think these two types are good practices you can start when exploring Binary Options as an alternative to penny stock investment.
PENNY STOCK INVESTMENT: FINAL WORDS
I hope you have discovered new knowledge with this article. Much of what I shared are knowledge from books and personal experience.
It is important to understand the underlying risk of any investment. Never invest with the money you don’t have and always drive sound decision through logical analysis and abundant research.
Thank you for reading, and If you think this article has value and worth sharing, then please help me by liking or sharing it.