There are big differences in penny stock vs. regular stock investing—mostly centered around risk
In assessing the differences between a penny stock vs. regular stock, it’s important to define the two. Many of the best “regular stocks” are blue chip stocks. Blue chip companies can give investors an additional measure of safety in volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price per share to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price), and promising growth prospects.
Most successful stocks share these qualities in common:
The most successful stocks come from successful companies.
The most successful stocks maintain or increase their dividends.
The most successful stocks have strong balance sheets, hidden assets, and experienced management teams.
On the other hand, some investors look to a penny stock vs. regular as a quick way to boost their investment gains. While buying penny stocks can lead to a big payday, even when you make the right choice, the odds against your success are high. Penny stocks are almost always involved in riskier ventures. Even if you want to take on that risk, you need to be extra careful about the penny stocks you buy.
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Penny stock vs. regular stock investing: Penny stocks are highly speculative
If you lose money in speculative pennies or other 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. (That’s a key difference between a penny stock vs. regular stock.) Still, even with luck on the side of the penny stock investor, if they play long enough, the “house odds” eventually triumph over any run of good luck.
Investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative penny stocks.
However, there are several potential risks when investors venture into penny stocks.
Buying low-quality 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.
In penny stocks, as with 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.
Penny stock vs. regular stock investing: Penny stocks prospects are often exaggerated
Penny stock promoters love to make deals (however tenuous) 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 penny stock promoters get a deal with a major, they 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 mineral property/unproven technology/revolutionary software is still in the early stages of development, it’s often a good time to sell.
Penny stock vs. regular stock investing: Penny stocks are more likely to be scams
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.
Penny stock vs. regular stock investing: Limit penny stocks to a small portion of your portfolio, if that
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.
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.
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.
Ultimately, penny stocks should be limited to a small part of any diversified portfolio. You should only buy them with money you can afford to lose.
What has persuaded you to invest in penny stocks over regular stocks, and have any of your penny investments evolved into regular, successful stocks?
Good marketing can make penny stocks can look like winners even when they’re about to crash. Have you ever gotten away from a penny stock right before a big loss? What were the signs that prompted you to sell?
This article was originally published in 2017 and is regularly updated.
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