If there’s a Wild West in the investing world, it would have to be “penny stocks”. These corporations get their name because their share prices are usually in the pennies (ie, less than a dollar) and are often less than one cent! For example, a penny stock may have a price of $.0033, representing a third of a cent.
What often makes a corporation a penny stock is the founders’ decision to “go public” (ie, sell shares to the broad investment community) before the company has a proven product or service. Investors who buy its shares at this point are taking a big chance because they’re buying into ideas (some would say dreams) that may or may not pan out.
For example, a company may claim that it is developing a part that, when installed in a car, doubles its gas mileage. The corporation says that it needs $1 million to finish the product, so it sells 10 million shares at $.10 each. If the company can actually complete this product, you may achieve gains. But it’s more likely that after a series of delays, the product is never actually released and your entire investment will be lost. There are other concerns with penny stocks, including:
- The stock price can swing wildly, doubling or losing half its value in a single day.
- It is often difficult to research them. If you bring up the symbol of a penny stock on a popular financial web site, many of the usual links will be dim because they are not available.
- Shares of these tiny corporations do not change hands between buyers and sellers all day long as with larger corporations. If you want to buy shares, you may have to pay a stubborn seller a high price to get his or her shares. If you want to sell, you may find little interest among buyers and have to drop the price you are willing to accept to motivate a buyer to step up and take them. The ability to sell quickly without having to drop the price significantly is called liquidity, and penny stocks lack it!
Finally, these companies don’t pay dividends. In fact, they may never have made a profit.
|Suitable for||People who prefer gambling over investing.|
|Examples||Here Media, Inc. (HRDI), HW Holdings (HHWW), Cardinal Resources Limited (CRDNF).|
|In the news||FINRA Fines Aegis Capital Corp. $950,000 for Sales of Unregistered Penny Stocks and AML Violations – August 3, 2015
SEC suspends trading in 255 dormant shell companies – February 2, 2014
The latest guilty pleas in Spongetech case – October 24, 2011
|Connections||Penny corporations are the opposite of blue chip corporations.|
|Explorations||You can find many web site which focus solely on penny stocks by doing an internet search on “penny stocks”. Visit these sites and make a list of any ten penny stocks. Then:
|A final word||Investing is difficult enough without resorting to putting one’s money in penny stocks.|