Penny stocks can be a lot of fun -- unless you're actually "investing" in them. I put quotation marks around the word "investing" because in most cases, people who put money into penny stocks are really just speculating, and not investing. Penny stocks -- stocks that trade for less than about $5 per share -- tend to be risky, volatile, and easily manipulated. They tend to have little information available about them and little in the way of a track record demonstrating their ability to rake in revenue and reap profits.
When you receive breathless emails full of misspellings and bad grammar urging you to "invest" in a penny stock as soon as possible, you're best off hitting the "delete" button. Or do what I do sometimes: Sock it away for a while, and then revisit it to see how well the stock really did.
Here's one example: A couple of years ago, I received an email about a little stock. Permit me to share some of it, with my comments.
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"Our weekly gift to you!"
"Our"? Who exactly is sending this email? -
"Big Press Release just out."
Anyone can issue a press release. -
"Price: 0.88" ... "5 day expected price 1.90."
So they expect the shares to double within five days. If this investment is so powerful, they'd be best off mortgaging their homes to buy all they can of it, instead of urging others to buy. -
"This one will run for sure."
Beware of any suggested certainties in the stock market. There are no guarantees, and even huge, strong companies can falter. Wal-Mart's (NYSE: WMT) continued growth may seem inevitable, but the stock has been relatively stagnant for a few years. Coca-Cola (NYSE: KO) stock, recently doing well, also faltered for several years. -
"Starting a new Marketing Campaign that will run all weekend. This will run thru Sunday. The World will know about this company Monday morning. Should you wait until too late?"
Oh dear. Most marketing campaigns tend to last for months, if not years -- not just a weekend! Think of General Electric's (NYSE: GE) "We bring good things to life." Or Burger King's (NYSE: BKC) "Have it your way." They would never have taken hold if the campaigns lasted just a few days. Trust me -- the world did not know about this company after its weekend marketing campaign. And even if some people learned of it, they shouldn't have learned enough to be persuaded to invest. -
"This one did very well during last marketing campaign. Very Well!"
A critical reader here would want details. Their absence is telling. -
"With this News we expect prices to exceed our projected price of 1.90."
So are they projecting $1.90 per share, or more than that? Again, it would be nice to see exactly why they expect such an increase in such a short time.
Investing in vapor
There are so many penny stocks that get hyped like this. If you've fallen for one or two in the past, don't despair -- it happens to many people. You'll run across some tantalizing but vague details that intrigue you, and the thought that you can buy thousands of shares for just a few hundred dollars can be rather exciting to the naive investor.
This particular company was touting its interest in mining and exploration, but I found no mention of what kind of mines. Is the company seeking gold? Diamonds? Copper? Coal? It gets more amusing. I did an Internet search and found a blog that detailed another hyping of the same stock. Check this out:
Grounded in natural resource exploration, [the company] also offers investors access to exciting new developments in the high-tech sector and the booming international real estate market. Our market based experience, tenacious research techniques, and razor sharp analytical skills allow us to leverage opportunities in emerging markets and developing technologies.
The company wants you to know it has its hand in lots of other high-flying areas, such as "high-tech," "booming international real estate," and "emerging markets." I'm surprised I didn't see "biotech" and "nanotechnology" also included.
Remember the promise that the stock would double to $1.90 per share? Well, I just checked, and it's trading around $0.05 per share.
What to do
The bottom line here is to steer clear of penny stocks -- though you may want to have fun following them as they crash and burn.
Remember that you can double your money with much less risk in more established companies. ExxonMobil (NYSE: XOM) and Boeing (NYSE: BA), for example, have doubled in just about four years.
If you're looking for companies with innovative ideas, ones that have the potential to double even more quickly, I invite you to check out our Motley Fool Rule Breakers newsletter. It focuses on exciting new companies and niches that are actually growing.
