Topic: Penny Stocks

Canadian tech penny stocks can offer investors big rewards, but they have risk to match

Investing in Canadian tech penny stocks can be very volatile. The top pennies will have these characteristics, but will still be very risky

Canadian tech penny stocks should never be more than a small part—if any—of any diversified portfolio. In fact, you should only buy the most speculative of them with money you can afford to lose.

Here’s what you need to know:


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Canadian tech penny stocks have a random element that could cost you

Tech stocks are often highly volatile. Some early leaders flame out. Others go through long setbacks due to industry downturns, corporate restructuring, regulatory issues and so on.

Journalists and economists make the same mistake as investors in tech stocks. They take too short a view, or expect steady gains, or disregard political constraints. Every deviation from growth makes them ask, “What happened to the gains we were supposed to see from this new technology?”

People generally fail to recognize the large random element in the speed and payoff of technological progress. It’s totally unlike, say, a steady paycheque, or the interest you get from a savings account.

The best Canadian tech penny stocks will share these characteristics

With tech penny stocks, there are proven ways to increase your odds of success:

  • Buy multi-product companies: Technological advances come in spurts, and they leapfrog each other. Focus on tech penny stocks that have some existing or soon-to-be-released products that are beyond the concept stage.
  • Diversify: The high-tech sector has more than its share of winners and duds. So, invest carefully and buy 5 to 10 tech penny stocks instead of just one. Gains on your winners should potentially offset any losses you have.
  • Focus on up-and-coming technologies: To do this, you need to know how technology is changing. For instance, the immense popularity of wireless devices, like the iPhone and tablet computers, has stepped up demand for faster, more reliable wireless networks.
  • Look for earnings: A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, or at least achieves positive cash flow, it can stay in business and perhaps reap the bonanza of a new product.

Here are some promising areas that successful Canadian tech penny stocks may get involved in

  • Automated warehouse systems that can pack and ship an order, untouched by human hands. Amazon was a pioneer in this area. Now it’s almost common at big companies. Few small companies can afford it.
  • Robotic workers have been around for a number of years. In a joint venture with IKEA, a Swedish construction firm uses a robot-equipped factory to build ready-made rooms. On construction sites, workers assemble the rooms into homes like LEGO toys. The process cuts construction costs by 35%, and reduces building time by up to 50%.
  • For some time, artificial-intelligence-equipped phone systems have been able to ask questions, understand callers’ spoken answers, and transfer calls to the appropriate department. Today, more advanced models can handle routine calls such as booking appointments without human intervention. Soon, artificial-intelligence chat lines will routinely tell you how to install software or fix computer problems.

These advances are still out of reach for most small companies. But fortunately for them, prices for new technology inevitably fall, as entrepreneurs find new ways to package it for sale. The latest technology will often find its way into smaller companies through cheaper, simpler versions of today’s breakthroughs.

Penny stocks entail a lot of risk—here are two of the biggest ones

Here are 2 of the major risks you face when you invest in lower-quality Canadian penny stocks.

  • Low-quality Canadian penny stocks are quick to fall when a bubble bursts: When the bubble bursts, 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. Penny stocks tend to be more speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software.
  • The longer you play, the likelier you are to lose: If you lose money in speculative 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. You can get lucky in penny stocks, just as in lotteries. In penny stocks or games of chance, the odds are against you.

Avoid speculating with Canadian tech penny stocks and instead use our three-part Successful Investor approach to profit in the stock market

  • Invest mainly in well-established, mostly dividend-paying, stocks;
  • Spread your portfolio out across most if not all of the five main economic sectors;
  • Downplay or avoid stocks in the broker/media limelight.

What do you look for in a tech penny stock to invest in that makes it worth the risk?

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