Q: I want to try and invest in the "next big thing." How can I find stocks trading for a few dollars or less that could produce big returns?
There certainly have been stocks that traded for less than $1 that became home runs for investors. For example, shares of satellite radio giant Sirius XM cost as little as $0.09 in 2009, but are now worth roughly 73 times that amount. It's turned into a truly excellent company -- even Warren Buffett became an investor. However, this is an exception, not the rule.
In the vast majority of cases, penny stocks -- which I loosely define as stocks trading for less than $5 or aren't listed on a major exchange -- end up being money-losers.
Here's why. Low-priced stocks listed on a major exchange like the NYSE or NASDAQ are generally cheap for a reason. Sears Holdings, for example, trades for about $2.50, down from more than $40 a few years ago, but you'll never catch me putting money into it at its new "bargain" price. The company has been losing money for some time, and a turnaround, while not impossible, looks highly unlikely. The same could be said for companies like RadioShack or Aeropostale, both of which traded for pennies, and then declared bankruptcy.
On the other hand, low-priced stocks that aren't traded on a major exchange are often targets of pump-and-dump manipulation scams or other activity designed to make money for a select few, not you (think The Wolf of Wall Street).
The bottom line is that you can certainly try to invest in the next big thing, but buying penny stocks isn't the way to do it. Instead, focus on legitimate, innovative companies trading on major exchanges with solid revenue growth.
