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Are Penny Stocks Worth The Risk?


For those interested in stock market investing. They can quickly be turned away from the enormous prices some stocks hold. The basic trick here is to buy low and sell high to make a profit. The same holds true with penny stocks. Penny stocks in reality, rarely ever cost a mere penny. However, they are far cheaper than many established stocks listed on the market.

The Securities and Exchange Commission (SEC) considers a penny stock to be most anything under $5 dollars. The penny stocks are also listed on both exchanges like NYSE and NASDAQ as well. The penny stock market, has undoubtedly gained a reputation for bad deals and many scams that have happened. However, there have been some massive success stories as well. Some people have actually become millionaires strictly trading penny stocks.

That being mentioned, trading penny stocks is not like buying a lottery ticket, though it may seem like it to some people. Connor Bruggemann is an example of a young penny stock trader and entrepreneur, who by the age of 16 made over $90,000 dollars trading strictly penny stocks. By the age of 18, he made well over $340,000 dollars. So, it is possible but not likely to have so much success. You really have to know what you are looking for and which stocks to buy and hold onto before unloading them later. Sometimes people are just lucky.

While paying attention to details is key. Always be sure to read the fine print. The disclaimers found at the bottom of a newsletter might hold warning for a red flag. Sometimes people are getting paid to pitch a stock because investors want more exposure for this particular company.

There is an allure about penny stocks, that attracts certain personality types. Some think someone can profit and make between 20% to 30% within just a few days. Sure, it does happen but be expected to lose everything.

After all, stock investing is always risky at any level. Many traders hang on and get greedy with their stocks only later to get burned. Most of the time they are looking for a high return. Always consider that the penny stocks you have, might be inflated. Even worse, they might disappear not long after. Good penny stocks are there, you just have to know what to look for.

Most importantly, try to research anything you can about penny stocks. You have to play detective here and look for anything out of the ordinary. Is the company ready to go under? Or, are they on their way to fortune and glory? First of all, look for revenue growth then look around for real financial data. Keep tabs on who the CEO of this company is. Are they bound for something successful? How is their track record from before?

Keep in mind, with many of these companies they are going to be relatively new. They also have a smaller market capitalization. They need to prove themselves first before growth is further initiated. Sometimes there is a real diamond in the rough, but spotting one is a real trick itself. Traders and investors scour each day looking at data from many sources before making their decision.

The companies prospected will likely not be willing or able to share any detailed financial documentation. They also may not be able to keep their stock above $1.00 per share either. Quite possibly, they have filled for bankruptcy. They then might even trade on OTC markets.

Penny Stock Investing

You have to ask yourself the question, “If I’m putting my hard earned money into this stock, will it disappear overnight?”

There are different tiers of penny stocks, which can be broken down into different categories. The first one are Tier 1 penny stocks, they are listed on the NYSE or NASDAQ markets. These are usually priced below $5.00 dollars a share but may be a bit more than that. Also, these stocks are required to disclose financial information and are held by a higher standard than other OTC penny stocks.

The next Tier 2 type penny stocks are considered traditional penny stocks. These are priced between 1 cent to 99 cents. Stocks can be traded at fractions of a penny as well. These stocks are also found on the NYSE or NASDAQ. By the way, these companies receive a letter stating that they meet the listing requirements and their stock will be listed above $1.00 dollar within an allocated amount of time.

If this company does decide to do this, then their stock will remain listed. If not, then they will be delisted and moved to the OTC market exchange. However, it’s very important to note that stocks that trade above $1.00 will never have a spread less than 1 penny. That means the stock will trade 1.01 x 1.02, or 1.05 by 1.06, but never 1.015 x 1.017. When a stock trades BELOW $1.00, the stocks will trade down to fractions of a penny.

Next up is the Tier 3 penny stocks. These stocks are listed below 1 penny per share. This means they start at .0099. The stock will not be listed on either the NYSE or NASDAQ stock exchanges. Warning, these are higher risk investments. However, there is a chance like anything else you could strike upon something worthy in a turnaround. These companies aren’t even strong enough to have their stock priced at 1 penny per share.

With Tier 4 penny stocks, they are listed as Trip Zero Stocks (Priced .0001 – .0009) Trip Zero Stocks are priced with 3 zeros. These are stocks priced between .0001 and .0009 per share. This makes these stocks easy to manipulate.

Each increment of these stocks will move up by 100% compared to the lower entry price of just .0001. Many of the “hot penny stock” alerts, are on sub penny stocks or trip zero stocks. This primarily benefits the people who first bought the stock in the first place. If someone were to buy 100 million shares of stock at .0001 ($10k) and the stock goes up to .0010 they will sell with $100k in profits.

In conclusion, if you have a bit of money to risk away. You can get many more shares of a company at these lower prices, than you ever would with a well established higher trading stocks.

It is quite possible to double or even triple your money, if you find those hidden gems. It is a risk however and you have to be careful with your investments. The overall recommendation is to further diversify your portfolio or start with something else far less risky.  

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  1. Pingback: What Is A Roth IRA And How Does It Actually Work? - Wise Sauce

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