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Pros and Cons of Penny Stocks

Are penny stocks right for you?

Penny stocks are very attractive for certain types of traders…and horrible for other kinds of traders. Penny stocks look like a dream come true…but are they? Let’s take a look:

The Low Price

While the low price may look like an appealing pro, penny stocks are cheap for a reason. I personally put penny stocks into the “get-rich-quick” mentality.

You may be thinking to yourself, “I can easily buy 500 or even 1,000 shares for super cheap! If the stock price goes up even $1, I’ll make a fortune! All the stock has to do is go up a tiny bit, and then I’ll sell it and make a ton of money!”

People look at penny stocks like the golden goose praying it will lay a golden egg. You probably have a better chance of getting struck by lightning than to make big money from investing in penny stocks.

Yes, you can make money in penny stocks, but you need to understand the premise, the how and why they go up, down or sideways.

Ideally, the penny stock should be shorted then go long. You have to be mindful – just because they are cheap doesn’t make them a great buy or a great trade.

Know what you’re getting into before you get into it. Just because it’s cheap doesn’t make it better!

Manipulation

Manipulation is easier with low-priced stocks. For example, if you spend $10,000 on a penny stock, you can move the stock several points. If you take a look at a video called “CRAMER MANIPULATION” on YouTube you’ll see that money managers put in millions of dollars just to move a stock.

It takes less capital to move a penny stock. When you see a move in one of these penny stocks, you don’t know whether it’s a real move or someone manipulating it by adding a hundred grand to it.

In my experience, these stocks will spike and then sell back the shares over time. Some of them do breakout and continue to rise higher…however, most of the time companies will spike and pop and then sell off.

You need to be careful about manipulation, especially when you’re into penny stocks. In fact, you could even manipulate the stock yourself depending on how many shares you’ve bought!

Personally, this is why I like to trade the big name companies (stocks are at least $200 a share). I like how stable and liquid they are…they tend to be safer investments.

In penny stocks, you need that liquidity…otherwise it moves too much. In big stocks, you need a lot more capital to manipulate them.

Getting Delisted

If you’re long in a penny stock, getting delisted could cause you a panic attack. Even big companies have been delisted…remember when General Motors was delisted? It can happen, but companies like GM tend to get listed again.

If a company files for bankruptcy and they are getting rid of their assets and selling everything they have to pay off their loans and other debts, you may be in trouble as a shareholder. Typically, shareholders get paid last in these situations. Plus, you’d get paid after the preferred stock holders and bond holders.

If you’re lucky, you may get paid if they have enough left over to pay back their stock holders. But chances are, you won’t get your money back. Your next move would be to try and get rid of your stocks on the secondary market, but there is less regulation there, which brings us to our next point:

Regulation Issues

With less regulation, you have market instability. It’s like a friend trying to sell you their stocks. You don’t have the luxury of going through a discount broker. You have to do a lot more work yourself and it’s a heck of a lot tougher out there on the secondary market.

Of course, this is supposing you are even able to sell your stocks on the secondary market!

We’ve talked about a lot of cons…what about the pros?

Well, if you truly understand how penny stocks work, you may be able to successfully capitalize on that knowledge. You could be the one to manipulate the penny stock you’re in…and manipulate it to your advantage.

I just don’t feel comfortable hyping penny stocks to you and here’s why: as your portfolio grows and you begin to make money on the stock market, let’s say $500,000, you’ll need to trade bigger, (pricier) stocks.

Why?

Well, if you stayed with penny stocks, the amount you’d be buying would be enormous. Any move you would make could manipulate the stock. So when you’re ready to get in or out of a penny stock, you’ll find that your actions affect everything and it will cause you difficulties.

Why not learn to trade the bigger, more stable stocks now?

Why not learn to trade the companies that may go up $5 or $7 dollars a day rather than companies that may move $.50 or a $1?

Remember: cheap stocks are cheap for a reason!

If they were such great investments, don’t you think the best, most intelligent brokers would be scooping them up in a heartbeat?

Let’s say you do still want to trade penny stocks…

  • You need to understand why and when companies are manipulating that stock
  • You need to sit on top of it and be quick on the trigger as changes happen quickly
  • You need to understand when to sell them and be able to sell them quickly
  • You need to be aware of your ability to move them too much if you own a large portion of the stock

If you can do these things and do them well, you can make good money.

But that is a big if!

I still recommend that you trade large, stable companies. Why?

  • It’s easier to get in and out
  • It’s easier to put more capital in
  • It’s easier to remain hidden because they are so large
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