Topic: Penny Stocks

QUIZ: Do you know how to invest in penny stocks for beginners?

how to buy penny stocks

Answer the investing quiz questions below to discover how much you know about how to invest in penny stocks for beginners and experts alike

Do you know the ins and outs of how to invest in penny stocks for beginners? Our quiz below will test your knowledge.


The appeal of risk

”Penny stocks have appeal for some aggressive investors who aim to get into fast-growing stocks at what they describe as ‘the ground floor.’ They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades…” Get your free complete guide to investing in Canadian penny stocks.

 

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The longer you invest in penny stocks:

  1. The likelier you are to lose money
  2. The better your chance at finding a hidden gem
  3. The greater the chance at one of the pennies turning into a market leader
  4. All of the above

You are correct if you answered A.

If you lose money in speculative pennies 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. 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.

Penny stock promoters are:

  1. Worth listening to as they often have valuable information
  2. Provide great deals on their investments
  3. Sometimes push marketing promotions instead of viable investments
  4. Always keep from overselling the stock’s relationship with well-known firms

You are correct if you answered C.

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.

Penny stock promoters love to make deals—however minor or indirect—with major, well-known firms. These deals are aimed at gaining the trust of investors. 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.

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.

Can you “negotiate” a favourable purchase price on the market when dealing with penny stocks?

  1. Yes
  2. No
  3. Only during certain times of the year
  4. None of the above.

You are correct if you answered B.

Investors who “bargain shop” for stocks explain that they are simply looking to buy stocks like a smart consumer would buy a car. But they overlook one key difference. Car prices do vary, and some buyers do pay less than others, because they have better bargaining skills and more time to spend shopping around.

However, the stock market is more efficient than the car market, as an economist would put it. You can’t negotiate a favourable price for a stock. To get a lower price, you have to wait for the stock’s price to come down.

Trying to always buy below the market will lead you to:

  1. Successful stocks
  2. An opening for added risk
  3. A well-diversified portfolio
  4. None of the above

You are correct if you answered B.

Two-part investing (picking a stock and then also picking the ideal purchase price) exposes you to a double risk. Seemingly attractive stocks can drop for months, or even years, before a hidden flaw comes to the surface and explains their weakness.

For that matter, little-noticed stocks sometimes rise for months before the reason for their strength becomes apparent. In a lifetime of investing, you’ll choose both kinds of stocks.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range ….and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. These stocks will always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

It is best to buy penny stocks:

  1. That are all in the same industry
  2. That are diversified across different market segments
  3. From the Toronto Stock Exchange (TSX)
  4. Only from U.S. stock exchanges

You are correct if you answered B.

When making a list of penny stocks, we recommend investing in a range of market segments. This includes software, biotech, technology, mineral exploration and so on.

Bonus tip: Use our three-part Successful Investor approach while learning how to invest in penny stocks for beginners—as well as other stocks for that matter, and you’re much more likely to find success

  1. Invest mainly in well-established stocks with a history of earnings and dividends
  2. Spread your money out across most if not all of the five main economic sectors
  3. Downplay or avoid stocks in the broker/media limelight

Would you recommend penny stocks for beginning investors? Why or why not?

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