Are Penny Stocks A Good Investment?

Wait…Really? I can buy 200 shares for $20. Wow! Just imagine what would happen if the stock started going up in price a lot. I’d be rich!

Boy, those penny stocks sure are attractive! But, are they worth their salt as investments? Are they too risky? Do penny stock newsletters work? These are all topics we’ll try to tackle during this post.

What is a penny stock exactly?
According to Wikipedia.org (see link below), a penny stock is any stock that trades for under $5 per share in OTC (Over-the-Counter) fashion. OTC is basically a forum in which lower-volume stocks can trade. It is outside of the normal stock markets, such as NYSE, AMEX, or NASDAQ.

Wikipedia.org – Penny Stocks

What is the historical performance of penny stocks?
After extensively searching for any evidence of studies conducted on the historical returns of penny stocks without success, I then came across the article below from Fool.com (see link). The article states that penny stocks, in their true form, aren’t subject to the disclosure rules that apply to larger companies. Therefore, you really can’t safely use their disclosure filings. They also aren’t followed by analysts or the financial press.

Wow! This explains a lot as to why I couldn’t find any solid historical return information.

What this means to me is that no one really understands them. Since I am not overly smart, why should I even try to understand penny stocks when I have all of the clear evidence of returns with index mutual funds and asset allocation? That’s right conscience. I should not.

Fool.com – Penny Stocks

Are Penny Stocks Too Risky?
Absolutely. As stated above, they aren’t subject to the same filing requirements as companies traded on the regular stock exchanges. This is enough for me to stay away from these OTC stocks.

But, what about stocks traded on the AMEX, NASDAQ, and NYSE for $5 or less?
Good question! Let’s take a look.

Another search for a comparison of average returns for this type of investment instrument also yielded nothing. Due to this lack of data, I would not buy them for myself as long-term, retirement nest-egg investments.

However, as I have mentioned in other posts, I believe that having “play money” to invest to keep you interested in investing and learning finance is a healthy exercise.

How much would qualify as “play money”? Naturally, this amount will change from person to person. For me, it would be no more than $100-$200, and it would be looked at as more of an entertainment/education expense than a money saving exercise.

In the beginning days of my investing career, I was slightly more naive and eager to experiment with different things. One of the things that I did experiment with were the “penny stocks” listed on the regular exchanges, selling for less than $5.

To guide my efforts, I used some birthday money to purchase a subscription to the Penny Stock newsletter at the link below. It was the best, most-unbiased, legitimate, and least hyped-up newsletter I could find. I then began to invest in the stocks recommended.

http://pennystock.com/

Even though I was slightly naive back in those days, I still was aware that this would only be play money. And, as such, I never invested more than a couple hundred Dollars in these stocks.

How was my track record with this newsletter? No so good. I ended up losing about a third of my play money. However, it didn’t hurt anything because those funds were marked as entertainment, and I was ready to lose it to begin with! It was also a valuable learning experience because I learned portfolio management, how to buy stocks, etc. The key was that it kept me interested in learning! See my point?

So, the bottom line here is that OTC penny stocks are not good to buy at all. Penny stocks on the AMEX, NYSE, and NASDAQ exchanges are not good investments, but can be fun to use your “play money” with.

Keep on learning!

Jacob

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