or coming back for more. Financial results early in a company’s life cycle can reveal a lot more in terms of upside potential for the share price – and early viability of the business concept – than those released after years of operations.
Customer changes
When a company has fewer customers, winning or losing one will have more impact. Customer changes could be really great (such as a penny stock going from two to three big clients), or very detrimental to the company and its stock price (such as losing one of only two big clients).
Changes in competitors
When a penny stock loses a competitor, it may be able to pick up the market share that has become available as a result, and that benefit may be very significant for a small company. When that same penny stock sees new (and sometimes massive) competition enter its space, its best option is often to get bought out or taken over (see Chapter 3 for details), unless the company has the patents and trademarks it needs to defend itself and its sales channels.
Chapter 2
Deciding If Penny Stocks Are Right for You
IN THIS CHAPTER
Finding out why penny stocks are so popular
Understanding the big business of tiny companies
Getting a grip on the bad press surrounding low-priced shares
Determining whether penny stocks are right for you
You’ve probably heard both sides of the argument about the value of trading penny stocks. Many investors are afraid of penny stocks because of their risk, the low quality of the companies, and the potential for fraud and price manipulation. Others point out that penny stock trading is one of the few channels in which a small amount of money has the potential to turn into significant wealth so quickly.
The truth happens to fall between these extremes. Sure, any information that’s available about the stocks is less reliable, and the underlying company may be newer and more risky than bigger, more established stocks. But compared to bigger and more established stocks, that company may provide much greater returns as it grows.
You may have heard numerous horror stories about penny stocks, and get just as many warnings about them from professionals, friends, and family members. Yet, at the end of the day, you may decide to invest in these speculative shares anyway. That investment could be a big mistake, but if you get involved in fundamentally solid penny stocks by using the methods I detail throughout this book, you could also be making a very profitable move.
In this chapter, I explore the growing popularity of penny stocks. I also reveal the big business of tiny stocks and detail the numerous negative connotations surrounding low-priced shares. My aim in providing you with all this information is to help you decide if penny stocks are an appropriate investment vehicle for you.
As the world goes increasingly digital, researchers can more easily track people’s interests based on their online activity. And just as you may expect, data from top sources indicates that people’s interest in penny stocks is on the rise.
The term “penny stocks” is one of the most popular financial queries on the major search engines, topping such phrases as “stock pick,” “stock quote,” “New York Stock Exchange,” “NYSE,” and “stockbroker.” Such searches represent millions of people worldwide actively looking for tips or guidance about low-priced shares, and that broad-based interest is growing.
I offer some reasons for the increasing interest in penny stocks in the following sections.
A high risk/reward ratio
You’ve heard the old adage, “the higher the risk, the higher the reward.” This saying is especially apt when it comes to penny stocks. Investing in speculative shares is always very risky.
However, you can dramatically reduce your risk in penny stocks – while maintaining your higher reward potential – by abiding by the various concepts I detail in this book.
I’ve personally lost $15,000 on a penny stock (risk), but I have also turned $30,000 into $500,000 (reward). After having traded all types of investments, from real estate to options and from currencies to derivatives, I’ve never found a more lucrative or reliable method for building wealth than buying fundamentally solid penny stocks.
The risk-reward ratio increases as you move down the list of these investment vehicles:
❯❯ Hiding money under your mattress: Barring a house fire, you won’t lose your principal with this savings strategy, but you won’t gain anything, either. Of course, even cash stuffed in your pillow will lose its purchasing power due to the effect of inflation.
❯❯ Certificates of Deposit (CDs): These investment vehicles have very low risk, but you get paid very minimally because they’re so secure. An investment of $100 may be worth only $102 a year later.
❯❯ Bonds: Government or corporate bonds expose you to minimal risk but have very low payouts. If you invest in bonds issued by riskier countries or companies, you can make a little more, but also increase the possibility of losing your money.
❯❯ Real estate: Property ownership has generally been profitable over time in most areas. However, the risk-reward ratio depends greatly on the area and your timing. Florida condo ownership was very profitable for a long time – until home prices collapsed and many people lost their shirts. Real estate investments also entail significant carrying costs (property tax, insurance, condo fees), and when you sell you face numerous disposition fees (real estate agent commissions, land transfer tax).
❯❯ Blue-chip stocks: Big name companies are generally considered to be safe investments, but they can drop in value and very often do. Although blue chips generally provide better returns than CDs or bonds, they can also go down in price, and so the potential for greater returns comes hand in hand with increased risk.
❯❯ Midrange and small cap stocks: These investment vehicles are riskier than blue-chip stocks and safer than penny stocks, making them a good option for people who aren’t quite ready to trade very small, highly speculative companies associated with the tiniest of shares.
❯❯ Penny stocks: Penny stocks offer the perfect mix of risk and reward for many individuals. You can push the odds of making money strongly in your favor by using the techniques I describe in this book. Plus, penny stocks are easier to understand than complex strategies required for options trading and they have the potential for bigger returns from smaller investments, when compared to other investment types.
❯❯ Options and derivatives: These extremely risky investment vehicles are only appropriate for complex hedging strategies. If you don’t understand what I mean by “complex hedging strategies,” then you shouldn’t trade options.
I’ve made money from each of these investment vehicles and I’ve also lost money from most of them. If you seek absolute safety for each dollar you invest, then penny stocks aren’t appropriate for you. However, if you are willing to assume risk in the hopes of creating some more money from your portfolio, you’ve come to the right place.
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