If dealing in Penny Stocks is such an unproductive form of investment, why is that so many people are forever in search for a share of the profits? Penny Stocks, as it happens, found their origin in the mining districts of Utah, USA in the late 1940s. Unregulated stocks for mining rights for uranium were sold across the coffee counter in a cafe in Salt Lake City. This was more reminiscent of the Wild West days than the post World War II era. Today, penny stocks have come to trade all over the country and enjoy international acceptance. Though not a regular occurrence, they can also trade on US Security Exchanges like NYSE, AMEX and NASDAQ with a minimum of formalities.
The Securities Exchange Commission has defined penny stocks as stocks of small companies generally trading under $5.00. In the U.K. this figure is one pound sterling. This may seem a misnomer since it is not unusual to see stocks on NYSE etc being traded for prices lower than those on the penny stock market.
Yet, people who are just starting out fail to realize that the penny stock market is one of the “undesirable” places to do business in. Many of them are poorly run companies and falsely claim that every penny stock has a great service or a product attached to it. They have fancy websites, almost inaccessible offices and a UPS mail box for an address.
They have no earnings, no cash or balance sheets. And no future prospects. Still, it is little wonder that these ‘Fly by Night’ ventures rake in millions of dollars. Most of the conservative investors are aware of the risks involved and steer clear of penny stocks. But for the vast majority, for whom an additional income is the lifeline to survival, the thought of prudent investing and earning in thousands of dollars is a temptation too strong to resist. After all where can you buy shares for a few cents and sell them for at least 2-3 times the amount in a matter of hours.
Facts prove that for a majority of people, possibly higher than 95%, it is a no-win situation. The simple reason for this is that when it comes to penny stocks it can be quite difficult to, single-handedly, gather information about their background and reliability. Besides, with stocks hovering at a few cents a piece most people are inclined to be casual and, sometimes, frivolous. They prefer to exercise their own judgment rather than seek professional help. This often turns out to be catastrophic.
Investors have come to understand that a majority of the penny stock companies may not only fall short of their promises and commitments, but may become extinct altogether. Yet, the 2%-3% companies that survive produce all the millionaires. These companies have outperformed just about every asset including gold, real estate and blue-chip stocks. Investments may be limited from $500 to $2000, and penny stocks, besides being readily available, move very quickly when handled in a correct manner. And it is no coincidence that giants like IBM, Apple and others have tread on the same humble road to success.
Our experts at Paradigm Capital Management always suggest that you do not place all of your money in a high risk zone without a proper assessment of your proposed investment. Your success on the long run will depend on the quality of your broker. Pick a traditional broker rather than a discount broker. The traditional ones, though expensive, provide you with Investment ideas, preparation of reports and your portfolio’s performance. Whether it is to buy or sell, they will handle all the transactions.
But remember, that on the long run, individual investors do not lean on professional expertise for longer periods than is necessary. So it is up to you to hone your skills and develop the capability to make sound financial decisions.
Also read: Ways to Compile the Best Penny Stocks List