Don’t Be One of Those Penny Stock Investment Experts

Of all of the questions that I receive, there is one question that seems to be more plentiful than other. The question is this: “What penny stocks should I invest in?” There must be a lot of penny stock investment experts running around because somebody needs to tell all of these young, inexperienced investors the truth.

I guess for today, that will be me so here it is. Penny stocks are dangerous. In fact, very dangerous and although there are a lot of people who act like penny stock investment is easy, that is far from true.

First, you aren’t going to make any money until you change your way of thinking before you start investing. We have learned in our everyday life to get products as cheaply as possible. If you’re like me, you love to play the haggling game with cars. I shop all dealerships in the area and play each together. Lower price means better deal.

While that does transfer to the stock market, penny stock investment isn’t successful if you buy the lowest price stock. It is only successful if you buy a HIGH QUALITY stock at a low price. Get out of the mindset that low price means better value. 10 shares of Apple priced at $175 per share is a much better value than 500 shares of Sirius XM radio. We don’t look at price until we look at the quality of the company.

Next, penny stock investment is dangerous because of the risk/reward. If you buy 100 shares of Chevron, you can be relatively sure that the worst that will happen is a temporary dip in the price of the stock. As long as you’re patient, you will make money or at least not have a very large loss. Penny stocks are different. If a penny stock drops in value, it may never come back. The company may go out of business and your money may be lost.

So look at the risk/reward. Chevron is low risk and at least medium reward. Penny stocks are high risk and low reward since penny stocks tend to stay penny stocks.

Finally, it’s difficult to evaluate penny stocks. Often, they don’t have positive cash flow, a lot of debt, and very little longevity. Is the debt they incurred to start up going to result in a healthy company or will the debt cripple them? Will they ever have a profitable product or service or will they, one day, suddenly close their doors taking your money with them? The pros often take chances with these questions. Are you willing to lose your entire investment?

Is penny stock investment worth your time? It may be but before you become a penny stock investment expert, you should be an expert stock picker in high quality names. Don’t look at penny stocks until you have a healthy portfolio of blue chip stocks.