Some investors ask us about how to find penny stocks to watch because they think this type of speculative stock can lead to quick gains. The reality is the longer you hold penny stocks in your portfolio, the greater the chances you have of losing money.
It’s true 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.
Not all penny stocks and their promoters are out to cheat investors. But it’s important to approach any penny stock with a healthy dose of skepticism, and avoid spending too much time looking for penny stocks to watch.
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Are Penny Stocks Worth It?
Learn everything you need to know in 'Canada's Penny Stock Guide' for FREE from The Successful Investor.
Canadian Penny Stock Guide: Find where to find Penny Stocks that pay well.
Penny stocks to watch for: 3 reasons to be wary of penny stock promoters
Investors in penny stocks also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of junior companies ever go on to significant success.
- Penny stock promoters aim to make companies seem bigger than they appear. When they get a deal with a major, promoters go to great lengths to make it seem bigger than it really is. Instead of announcing that the big company has invested, say, $50,000, penny stock promoters may issue a press release that says the two companies have entered into a “multi-stage development plan”. The release may say the major has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or an online link for investors who wish to order the enticing brochures.
- “Orthodoxy” can develop within a business or a penny-stock promotion. People often think of orthodoxy as an attribute of religious groups. But it’s an all-too-human phenomenon that turns up in many parts of our lives, including science, nutrition, finance, investment and elsewhere.
- Bad penny stocks require the most intensive marketing and promotion. As mentioned, penny stock promoters love to make deals with major, well-known firms. These deals are aimed at gaining the trust of investors—stock investors are far more likely to buy penny mining stocks that have agreements with companies like Barrick Gold, BHP Group or some other major mining company to finance exploration of their mining claims. This isn’t limited to just penny mining stocks. All penny stocks hope to gain the trust of investors. For example, a penny stock may issue a press release about how Sony, Apple or some other household-name multinational has agreed to sign them up as a “channel partner” to potentially co-market a computer program or electronic gadget. The penny stock hopes that the link with a major brand will give them instant credibility, even if it far from guarantees any sales or profits.
The longer you play, the likelier you are to lose, so take care with the amount of time you spend on penny stocks to watch
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. But 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 stake 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.
Aggressive investors searching for penny-mine stocks to watch need to keep these investment factors in mind
- We want to see experienced management with a proven ability to develop and finance a mine.
- We 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.
- When we recommend junior mines that only explore for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.
- We think you should avoid stocks that trade over the counter, where such things as regulatory reporting are lax.
What is the longest you’ve spent watching penny stocks before buying or avoiding … what is the longest you have held a penny stock in your portfolio before selling?
Have you found success with penny stocks? What tips can you share that have shaped your strategy?