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.

Topic: Penny Stocks

How we pick our recommended stocks—and how pennies fit into that mix

Here’s how our “hold” advice fits into our recommend stocks—and some bonus tips on penny stock investing

We continually scour the Canadian and U.S. markets for stocks to recommend as buys to our clients. We generally get excited about only a handful—that is, excited enough to list recommended stocks as buys in our publications.

Most stocks we look at have one or more serious flaws, in our view. If you ask about stocks like these, we’ll tell you to sell.

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.

If we say a stock is “okay to hold,” it doesn’t mean it’s one of our recommended stocks

A large number of stocks that we look at for our Inner Circle members fall into a grey area. We wouldn’t advise buying them, but they are “okay to hold,” in our view. We just don’t feel strongly enough about these stocks to advise buying.

Of course, they may feel more positive about some of our okay-to-hold stocks than we do. If the Inner Circle members want to buy them for their portfolios, we can’t voice any strong objection. We simply don’t share their enthusiasm. We feel they’ll find better choices among the buys we currently recommend in our newsletters.

Note that when we say “okay to hold” in our Inner Circle advice, we mean something substantially different from when we recommend a stock as a “hold” in our newsletters or Hotlines. In our newsletters and Hotlines, it means we recommended the stock as a buy in the past, and we may recommend buying it again in the future. But at the moment, we see better choices for new buying elsewhere in the newsletter.

Here too, however, you need to apply our advice to your own situation.

Look to our “holds” if you want something to sell to switch into one of our recommended stocks

If you mostly own stocks we see as “holds,” you should consider selling some of them and replacing them with stocks we see as buys. Of course, before you sell, you need to consider any capital gains tax liability that the sale will involve. You’ll need to weigh that tax cost against the benefit that the transaction will bring to your portfolio. You’ll also need to consider the effect that the sale of one stock and buying of another will have on your portfolio. You’ll need to consider how well the revised portfolio lines up with your resources, goals and temperament.

The complications are endless, but the basic rule is simple. When you own good stocks, it generally pays to hold on until you have a good reason to sell. When you own mediocre or speculative or bad stocks, the reverse is true. It generally pays to sell unless you see a good reason to hang on.

Penny stocks are not typically among our recommended stocks

Penny stocks can be riskier than other investments. 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 Canadian 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.

Pennies aren’t usually among our recommended stocks because the odds of success are against you

However, 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. 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 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.

While penny stocks can be a worthwhile addition to the aggressive portion of a diversified portfolio, you should in general only buy them with money you’re willing to lose.

Penny stocks are only one kind of aggressive and speculative investments. What type of investments do you look for when adding to the aggressive section of your portfolio?

Penny stocks can pay off, and give investors a rush, but they don’t make good long term investments. Would you agree? Or is there a time when penny stocks can be good for long term gains?


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