It doesn’t take a seasoned trader to know the first rule of investing is to buy low and sell high. Therefore, it might seem like penny stocks would make a lot of sense, especially for those of us without a lot to spend. After all, you could easily buy thousands of shares without risking much and if you happen to pick a good one, the sale would net you a small fortune.
That’s how you’d like it to work anyway and it’s usually this hope that keeps penny stocks (which are basically any stock trading for $5 or less a share) relevant. But the truth is that these stocks rarely pay off. Optimists will look at a stock trading at $00.01 a share and rationalize it’s worth spending $10 because it’s such little risk with so much potential reward. You have to remember, though, that stock isn’t trading at $00.01 a share because the company’s doing something right. So you stand a very good chance of losing $10 for nothing. Keep chasing that mentality and you’ll be no better than a gambler who’s throwing their money away.
Again, the vast majority of companies aren’t penny stocks because they’re simply a diamond in the rough. When you think about how many financial geniuses are playing the stock market all over the world, it’s near impossible that this kind of exception would exist out in the open like this. Instead, a lot of these companies are on their way to bankruptcy or otherwise going out of business and may be using penny stocks for one last shot at capital. They’ll take your money, declare bankruptcy and leave you with nothing.
Most people also take for granted that they can simply sell their penny stocks whenever they wish like with conventional versions. The hard truth is that unless your penny stock turns out to be a winner, you may not have anyone willing to make the same mistake you did.
Even those without a lot of capital can explore mutual funds, CDs and other affordable investment opportunities instead of something as risky as penny stocks. Simply put, they’re not worth it.