Penny stocks may sound good, but …
To the uninformed, penny stocks (stocks that trade for less than $5 per share) can be darn appealing. Imagine you have $2,000 to invest. You could buy about 30 shares of a $65 stock, 110 shares of an $18 stock or 15,000 shares of a 13-cent stock. Doesn’t having 15,000 shares sound much better than owning 30 or 110 shares? It shouldn’t.
Penny stocks are often tied to small, unproven companies with no track record of solid financial performance. Worse, these stocks are among the easiest to manipulate and are often manipulated by scam artists. Many quickly plunge in value.
There was, recently, a spirited conversation about penny stocks on our Investing Beginners discussion board. (Check out the board at http://boards.fool.com, under “Learning to Invest” in the left column.) A newcomer, Rob, said, “I just want to have a little fun with (penny stocks),” and he received some excellent advice.
One person summed up the Foolish point of view succinctly: “You’d be better off going to Vegas or (Atlantic City).”
Someone else added: “Not all penny stocks are gambles. Some can actually be good investments that later become highly profitable, but it’s like finding diamonds in a world of shiny rocks. You should stay away from placing money in penny stocks.”
Another person offered a good idea: “Do it on paper instead of with cash.” He then suggested that the money that would likely have been lost on the penny stocks be donated to charity.
Finally, a helpful sort offered links to articles where Rob (or anyone) could learn more. Rob then reappeared, thanking everyone and adding, “I think I will stay away from this!”
Consider steering clear of penny stocks yourself. Remember that you can get rich with well-known, proven companies instead. If you own a piece of Dell, for example, you own the world’s top computer seller, one that takes in more than $55 billion in revenues each year and sports a net profit margin of 6.4 percent. Invest in Wal-Mart or General Electric, and you’ll own chunks of the world’s largest companies, not shaky manipulation targets.