Monday, May 11, 2015

Penny stocks can leave you penny less: Facts and Thoughts on this topic

Before I begin, just want to say that I respect everyone's opinion and investing strategies. Hence, if you are a fan of penny stocks, feel free to skip this. The post is a combination of researched facts as well as my own personal opinion on the topic. My hope for this post is that it serves as an educational and informational tool for people looking to educate themselves on this topic. Enjoy!

Hello everyone!

Hope everyone is having a great Monday so far. As always, work has been super busy but no complaints. Actually feeling very fortunate and grateful.

Today's post is dedicated to all the people that have asked me about penny stocks over the years. I actually cannot believe it took me this long to write this. I had to search all of my posts for the last 3+ years since the inception of this blog to make sure I didn't cover this yet. And surprisingly, I have not.

Just recently I have gotten emails and messages from people asking me what I think about penny stocks and whether I would recommend them, even asking me for ticker symbol recommendations. The short answer for anyone and everyone wondering whether this is a good idea, here is the bottom line:

Stay away from penny stocks. Run if you have to.
 Your hard earned money deserves better. 

Its probably very possible to write a whole book on this subject. However, I will leave you with the top five facts I feel are most important for you to remember:

1. Penny stocks are generally referred to securities that trade for $5 or less- often times (or, all of the time) is a company you've never heard of before or have no clue what they do. 

2. As noted by the SEC (Securities Exchange Commission); The stocks trade very infrequently meaning that it may be difficult to find someone to purchase the stocks from you once you attain them, which means you may very well be stuck with worthless shares.

3. Penny stocks are considered speculative investments. They have no law requirement to disburse all of their financial (or any) information and they are not regulated to the extent that legit, established securities are. For instance, established/legit companies that are publicly traded, are required by law to provide information to the SEC year after year. This includes- quarterly reports (10Q), annual reports (10K), management and compensation information (proxy statements), change in management, shifts in company strategy, pretty much their every move. The extensive disclosure of information lets investors know all the information they may need to make an educated decision on whether or not the investment would be profitable.

Penny stocks do not have these type of requirements. 

4. Based on the above, it is highly possible that you may loose all your money  and guess what, because there is no much regulation, no one will care. As clearly noted in the SEC website:

"Investors in penny stocks should be prepared for the possibility that they may loose their whole investment (or an amount greater than their investment if they purchase penny stocks on margin)".

5. While it may be true that some people get lucky and actually make a good amount of money in penny stocks, these stories are rare. Remember that there are a lot of scam artists out there- if you have ever heard of the phrase "pump and dump" that's where it comes from. Experienced people in this area can easily 'hype up' a random ticker symbol and when everyone is in, they will go ahead and sell, and leave you penny less. 

My recommendation

You work hard for your money. You want your money to work hard for you. Whether you are a fairly new investor just learning and just getting started, or an experienced well-seasoned investor, I always recommend focusing on companies that are well-established within their respective industries and that have a clear and specific competitive advantage. 

If you want your portfolio to have a bit more 'edge' or more 'risk' with a possible high potential; go for companies that actually follow the SEC guidelines and that are regulated. Even if they have not yet 'proven' themselves, at least you'll have the peace of mind that every move they make will be completely public and transparent for you because they are regulated. You wont have to worry about waking up tomorrow and finding out the 'penny stock' that was supposed to make you wealthy, ran away with your money and your dreams. You also don't want your money just sitting there in the 'red' while you blindly sit and wonder what will happen next. Who wants to be in that kind of situation?! I like to sleep well at night. 

And that is all my friends. Wishing everyone a fantastic week!

TELL ME, What are YOUR thoughts on this topic? Would love to hear your opinion. If you know of anyone that has become wealthy trading penny stocks, share that as well!

Cheers to profits,