I just don’t get it. When I logged on to my computer this morning I opened up my browser and the first thing I see is “How thousands of people are making Fast Money in the stock market.” I wanted a good laugh so I opened the link. The article that opened was titled Penny Stocks Can Mean Huge Returns – If You Know The Right Ones To Buy. When I was 15 I would have loved this article. Now that I’m a little older, a little more educated, it just makes me mad. Here we are in the middle of horrific financial times: we are losing homes, we can’t retire when we plan on it, and we still can’t find jobs (or we took a huge pay cut). At this point in time we can use all the help we can get when it comes to investing, but instead of assisting us by showcasing valuable information they feed us crap!
I think the title says it all. Penny Stocks Can Mean Huge Returns – If You Know The Right Ones To Buy. ANY stocks can mean huge returns if you know the right ones to buy. Heck, I can play the lottery and get colossal returns if I know the right numbers to pick! I love the example they used in the article to help sell their idea. “Now imagine if you bought 20,000 shares of a penny stock at half a cent a share (which would cost you $100), and it goes to a dollar next week…” To that I say “Now Imagine if you bought 20,000 shares of a penny stock at half a cent a share (which would cost you $100), and it stays like that for years so your $100 is tied up. Meanwhile, you lose your job and can’t afford to eat. You try to sell your shares to get that $100 back, but the bid/ask spread is so far apart you end up only getting $20 back!” You might think both scenarios are unlikely, but I think the second is a lot more likely than the first.
Just in case you didn’t know, the bid/ask spread is the difference in price between what someone is willing to buy the stock for and what someone is willing to sell the stock for. It doesn’t play a big role with most normal stocks, but it plays a huge role in penny stocks. If you have a stock that is said to be worth $.01 but people are only willing to pay $.005 for it, you can’t sell it unless you take the lower offer. It works the other way around for buying penny stocks.
With our current economic condition it’s more important than ever for us to be careful with our personal finances. We all want a miracle, but penny stocks aren’t the answer. If it was that easy, everyone would be doing it. It may seem like $100 isn’t that much money. It might be worth the risk to make “fast money”, but if we thought like that all the time we’d be broke. If I haven’t changed your mind about penny stocks do a few things before you invest in them: 1) Look up a few, 2) Check their bid/ask spread (you can use yahoo finance), and 3) Watch them for a while. If you’re still into it, go for the gold.