Here in Fooldom, as we try to guide investors into sensible and effective investments, I believe we can't warn people enough about the dangers of penny stocks. That's because to the uninformed, they're just so darn appealing. Consider that you have $1,000 to invest. You could buy about 15 shares of a $65 stock, such as ExxonMobil
The problem is that we often fail to think it through. Penny stocks are often tied to small, unproven companies with no track record of solid financial performance. Worse, these stocks are among the easiest to manipulate and often are manipulated by scam artists. If you own 55 shares of Applied Materials, you own a chunk of a nearly $30 billion firm that's the largest supplier of equipment and services to the global semiconductor industry, a company that takes in some $8 billion annually and has a net profit margin well above 15%. If you own a piece of ExxonMobil, you own a piece of American history, one that takes in nearly a third of a trillion dollars in revenues each year and sports a net profit margin around 10%.
Don't just listen to me, though. On our Investing Beginners discussion board the other day, new Fool Rob5167 asked:
"I realize the risks involved with [penny stocks]. I currently have an account on Sharebuilder.com, investing x amount monthly amongst x # of stocks. I was wondering if anyone knew of a site that offered the same type of investing for penny stocks. I just want to have a little fun with this type of investing. Also, does anyone know of any free newsletters or sites that are good for advice for penny stocks?"
Rob quickly got some good advice. Ramseesforever summed up the Foolish point of view very succinctly: "You'd be better off going to Vegas or [Atlantic City]."
Then SockPuppetMan chimed in, noting that, "Not all penny stocks are gambles. Some can actually be good investments that later become highly profitable, but it's like finding diamonds in a world of shiny rocks. Almost impossible. I agree with Ramsees, you should stay away from placing money in penny stocks...."
Since Rob5167 had said he "just wanted to have a little fun with this type of investing," Dougdoogle offered a good idea: "So do it on paper instead of with cash." He then suggested that the money that would likely have been lost on the penny stocks be donated to charity.
Bbogwan said: "If you insist on this I suggest you screen for stocks with market caps less than $200 million. I don't see the fascination with share price less than $0.10 or whatever. Note that illiquid stocks have the equivalent of a front- and end-load of about 5% each. Some days you will not even be able to buy the stock, [if there are zero] shares traded."
Wcfenton pointed to places where Rob5167 could learn more, and later shared some sample portfolios. Rob then reappeared, saying, "Hey, I just wanted to say thanks to everyone who replied to my posting. Bill, I did read that article you suggested through the link, I found it interesting as I did everyone's advice to me ... I think I will stay away from this!
Learn more fascinating stuff about penny stocks in these articles:
- Straight Talk on Penny Stocks
- A Penny Stock Penny-Pinching Guide
- Penny Stock Nation
- The Right Kind of Pennies
- Be a Penny Stock Millionaire!
- Penny Stocks From Heaven
Longtime Fool contributor Selena Maranjian does not own shares in any company mentioned in this article.