Resist The Temptation To Buy Penny Stocks

by Hank Coleman

Resist The Temptation To Buy Penny StocksMany investors are drawn to buy penny stocks because they believe they have the potential of obtaining a sizable gain on their investment. Therefore, the term, penny stock, is often synonymous with a micro cap stock.

Micro cap stocks are those stocks with a market capitalization which is the total market value of a company’s shares that are outstanding of $50 million to $300 million. Companies with market capitalizations of $50 million or less are very risky and are classified as nano caps. Cap is short for capitalization.

Some investors are drawn to the idea of quick, sizable profits when they invest in penny stocks. After all, it is pretty tempting to think that you can buy 50,000 shares with only a $500 investment.

But, regardless how small the price is per share, you still have to make sure you know what you are buying. Often, there is a reason that these stocks are trading so low.

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Research Can Be Difficult

Although the micro cap shares of some companies that are listed on the Over-The-Counter Bulletin Board (OTCBB) may be worth buying, you can still find excellent stocks that offer opportunities for investors which are traded on NASDAQ and the New York Stock Exchange.

Penny stocks are chancy investments, so you need to do some research first before you decide to take the plunge and make any trading decisions. Unfortunately, research can be a difficult process as penny stocks usually are newly formed companies or companies with poor credit standings. Therefore, they often lack any kind of historical data in which you can gauge their potential for growth.

In addition, the stocks often have a low amount of liquidity, which can make it difficult for you to sell your holdings. As a result, any information that you do obtain on a penny stock can be rather sketchy.

Because such stocks are often traded in lower volumes, analysis is often undependable. It seems rumors and news are the predominant forces that influence stock movement in this sector.

Other Ways To Invest and Buy Penny Stocks

In lieu of micro caps, you might consider purchasing undervalued stocks. Sometimes a company’s performance is not compatible with the stock’s price. Usually, an outside factor is the reason for the incongruity.

You can also look to buy penny stocks that are being newly released by companies. Initial offerings of stock are made on a weekly basis on the stock exchange. Check out the companies. If a particular company is headed by good managers and demonstrates a positive cash flow, its stock may be one you’ll want to consider and ultimately buy.

In any event, if you still want to delve into penny stocks, do so with some caution. There are still many individuals who enjoy trading penny stocks even with the associated risks. Others like to buy a stock and hold onto it with the belief that it will one day surpass everyone’s expectations.

Therefore, if you cannot resist the temptation of investing in OTC stocks, make sure, at least, you are realistic about the possible financial outcome.

What about you? Do you buy penny stocks? Have you ever bought penny stocks?

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 578 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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