Topic: Penny Stocks

Penny stock investments: Why it’s important to use caution when investing in penny stocks

There are many risks with penny stock investments, and we aim to shed light on those negatives in this article

Penny stock investments do sometimes pay off, but there are many pitfalls to avoid. You should be aware that many penny stocks are little more than very well executed marketing campaigns. Penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.

There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but bad for investors looking for an unbiased opinion on a stock.

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Promoters of penny stock investments sometimes aim to make companies appear bigger than they are

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 property/program/revolutionary software is still in the early stages of development, it’s often a good time to sell.

What penny stock companies don’t want you to know: The longer you play, the likelier you are to lose with penny stock investments

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.

Sometimes you might get lucky for a short time—for example, in the early 2000s, buyers of Internet start-ups made far more profit than investors who stuck with well-established companies.

However, 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.

The odds against success are high with penny stock investments

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.

When penny stock promoters manage to make a deal with a major firm, they often go to great lengths to make it seem bigger than it is. It pays to remember that a big company doesn’t go into a situation like this the same way you do. The big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right.

Instead of trying to predict the future of an investment, which is nearly impossible in penny stocks, diversify across different market segments, like software, biotech, technology, mineral exploration and so on.

If you’re buying penny stocks that are perpetual money losers, they will eventually go broke, no matter how impressive their technology. But if a stock makes even a little money, it can stay in business and perhaps reap the bonanza of a new product. Diversifying helps this effect, and since you should only invest in penny stocks with money you’re willing to lose, you may have a greater chance at winning.

The only way to minimize the risks of predicting the future of penny stock investments

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 finally 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.

Have penny stock investments been successful for you? Share your story with the community in the comments.


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