Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 178

Penny Stocks

You may know of someone who got into a speculative investment with a penny stock and made a ton of money. You may have heard of others who lost their shirts on them. Penny stocks refer to stocks that are very cheap: typically below $3 a share. They are not necessarily pennies per share like many think (although some are). Investing in penny stocks is speculative because normally the companies behind these stocks are questionable. Some may be good and valid companies who have just become wallflowers (meaning they have dropped below investors' radar screen) for a number of reasons. Perhaps a rumor, or they just don't seem sexy enough, or their products are not so well known. Some others may have bright futures but they just haven't proven themselves or they haven't been discovered yet.

So for the most part penny stocks are cheap, because investors have shown no confidence in them. My opinion about penny stocks is to only invest in them using risk capital (the kind of money you can afford to lose). Penny stocks can offer enormous profits once they are discovered by investors. Consider that a $1 stock appreciation on a $50 stock may not seem like much, but a $1 increase for a $1 stock means doubling the investors' money.

Many people have the false assumption that a $1 stock cannot possibly go any lower. Wrong. They can and they do go lower all the time. Even as low a 1/10 of a cent or lower. Remember the rule of supply and demand. When demand isn't there, prices can decrease indefinitely until some support is found, wherever that may be. And in some cases, the company may just be going out of business, which means the shares will end up worthless. Penny stocks are cheap for a reason (and usually a valid reason). Invest in them only with risk capital.


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