Penny Stocks For Dummies. Peter Leeds

to reaching your end goal. Focus on the end goal alone and you will never reach it. Like the turtle taught us when he raced the hare, slow and steady wins the race.

      Penny stocks appeal to the impatient

      I am an impatient investor. Perhaps that’s why I was drawn to penny stocks myself. In fact, a significant proportion of investors who follow me, as well as those who seek out low-priced shares through other channels, tend to embrace the volatility of the underlying investments. The potential to make significant moves very rapidly appeals to them, even as it exposes them to equivalent downside risks.

      While impatience may be the reason why many investors seek out penny stocks, this character trait can cause investment problems. Impatient investors may sell shares at inopportune times, such as just before the stock begins reflecting stronger operational results. They may jump from investment to investment in a constant hunt for profits, which can lead to many poor trading choices (not to mention excessive brokerage commission fees).

      To succeed with penny stocks, you need to choose contemplation over impatience. Give the underlying company time to let its business plan play out. As long as the penny stock is making progress, however slow, and the reasons you got involved with it in the first place still hold true, let the shares gradually reflect the improving operational results.

      

Keep in mind that the slower and more gradual the move up, the more sustainable the higher prices will be. Rapid and sudden price spikes typically don’t last.

      The greatest gains in penny stocks come over years, not days. Shares that balloon from 5¢ to $5 only do so over the course of longer time frames, and one winner of this magnitude will trump all the 5 percent and 20 percent profits you may see from decades of trading. But only patient investors have the wherewithal to enjoy these kinds of opportunity.

      Newer investors gravitate to penny stocks

      Typically, newer investors are interested in penny stocks because they believe there is less downside. They find smaller and newer companies less intimidating, and they expect such investments to be more attainable and appropriate for their minimal level of trading experience.

      Although such reasoning isn’t without merit, it can be dangerous. There is just as much downside risk in a 1¢ stock as in a $99 stock (100 percent loss potential in each case). Also, finding high-quality penny stocks is much more difficult than uncovering good investments among larger shares, mainly because low-priced stocks have fewer companies of high caliber and a greater percentage of lackluster options.

      Despite the aforementioned pitfalls, newer investors may find many benefits to starting off with low-priced shares:

      ❯❯ Broader diversity of investments. Newer investors will learn much more from trading numerous types of investments, rather than just buying one or two. With penny stocks, you can spread a small investment among several stocks.

      ❯❯ Greater volatility. Larger and ostensibly more boring investments will not teach their shareholders much. Penny stocks will display greater volatility and, as such, be more educational for the newer investor.

      ❯❯ Price moves happen much more quickly. Whether your investment is going to go up or down, it will happen over a much shorter time period than with larger stocks. Newer investors tend to be attracted to these faster price moves.

      ❯❯ Steeper learning curve. Newer investors have the most to learn. The combination of greater volatility in penny stocks, rapid price moves, bigger magnitudes of those moves, and the potential to own several different stocks at once, enables inexperienced traders to get up to speed very quickly.

      For newer or less-experienced investors to quickly learn about trading, or to develop their own styles to afford them the greatest opportunity to profit, penny stocks may be the perfect outlet.

      

When I talk about high-quality penny stocks, I’m referring to specific criteria that add to the strength of the investment. Among other factors, these include a strong and respected management team, low debt loads, plenty of positive cash flow, positive earnings, growing market share, and low customer attrition rates. Other criteria include having a solid position within an industry with high barriers to entry, strong alliances with top customers, improving financial ratios, and very effective branding and marketing. You can find out more about all these ways to analyze penny stocks when you flip to chapters 8, 9, and 10.

      Penny stocks appeal to smaller portfolios

      Individuals with less money to invest may only be able to afford a few shares in a larger company. They also may not be too impressed by 5 or 10 percent gains, especially if that adds up to only $50 over the course of an entire year.

      Given their situation, many investors with minimal portfolio values opt to not invest at all. Others gravitate to penny stocks.

      Investors who believe in the power of penny stocks, yet who do not have a significant portfolio, understand that low-priced speculative shares may be the best way to increase their financial standing. Of course, not all traders who buy and sell penny stocks have a small portfolio, but a significant portion of traders with small portfolios do trade penny stocks.

Being Honest with Yourself: Are Penny Stocks Right For You?

      Penny stocks appeal to millions of investors and potential investors. Low-priced shares have probably caught your attention as well, as evidenced by the fact that you are reading this book.

      Take a moment to consider if trading penny stocks is actually appropriate for you.

      Penny stock investing may be most appropriate for individuals who

      ❯❯ Are willing to do the work required. Investing in speculative shares requires effort on your part. Proper analysis, performing due diligence, and monitoring the shares you purchase, all require work. Investors who put in the time garner the greatest rewards.

      ❯❯ Possess a high tolerance for risk. You will enjoy penny stock investing more if you can tolerate risk and volatility well. If you are going to lose sleep over 20 percent price swings, safer investments may be more appropriate for you.

      ❯❯ Intend to invest “play” or risk money. It would be a mistake to invest in speculative stocks with money intended for your child’s education or to buy groceries. Penny stocks are best traded with funds you have set aside to have some fun. Never trade with cash you’ll need for the important things in life.

      ❯❯ Are skeptical of what they read. The penny stock industry is filled with hidden motivations and misleading reviews of the companies. Don’t believe most of what you read, and always perform your own due diligence.

      ❯❯ Have realistic expectations. You might make some good money trading penny stocks. However, if you’re expecting to become a millionaire from a $300 investment, you will be disappointed.

      ❯❯ Have time available for research and trading. Unlike day trading or options trading, you won’t need to be glued to multiple computer screens all day long. However, the more time you can set aside to research your shares and monitor them, the greater the level of success you will probably enjoy in penny stocks.

      If you decide that penny stock investing makes sense for you, I encourage you to keep reading. In the rest of this book I go over every concept I know for investing well in low-priced shares.