Before discussing whether penny stock picks are a good idea for investors, let us delve into understanding a little about this type of investment.
A fairly widely agreed upon definition of a penny stock is that it is any stock that is traded at five dollars or less. For some investors, this type of trading is the best and their entire portfolio is only built on this vehicle. Although the price of the stock is low, resulting in low profits per sale, the market is huge and with enough volume, it can result in some significant financial success.
However, not all investors are enthusiastic about this form of trading. Their main objection is not the size of the buy and sell prices, but the volatility of the stock. They believe that while it is possible to make quick profits with rapid sales, it is also a market with low liquidity, making it difficult to go short, or apply other trading strategies that are possible with larger markets. Another objection is that there is a lot of slick manipulation in this specific marketplace. Since there is little regulation of these tiny stocks, it is not for the naïve investor.
Alternatively, those who like the idea of buying low and making a quick sale in a market with low liquidity believe that with the right research, examining the profile and history of a company, it is possible to make huge profits. They contend that once you know what you’re doing, you can do very well in this form of investing. They point to success stories where shrewd investors have profited in the millions.
Obviously, then, since some speculators believe that penny stocks are questionable investments and others believe that they are fabulous choices, the truth about their value as an investment vehicle, as in most cases related to the stock market, has more to do with the trader than with the vehicle.
Basically, penny stock success is based on having a penny stock mentality.
Here, then, are some characteristics of traders who do well with this investment.
- The investor is willing to buy a stock regardless of whether it is popular or not. He or she believes in the value of the stock based on research about the company and will buy a nine cent stock not because of public opinion but because of the company track record.
- The investor is even-minded. He or she does not get elated when it goes up a few cents nor get depressed when it drops a few cents. The decision on whether to buy or hold is not based on fear or greed, but on a chosen strategy on the best rules for when to buy and when to sell.
- The investor works on the law of averages, deciding whether to buy or sell really depends on what the average behavior of the stock has been.
- The investor is willing to sell when the stock doubles and will sell at least half of it. This, despite, how much the investor has fallen in love with the company.
- The investor is willing to dump a stock when due diligence reveals that the company has made some really questionable decisions that may not work in its favor. For example, the company may be trying a new product or service because it sees a hot new market trend emerging. The investor, on the other hand, may consider the trend more of a passing fad and not worth allocating resources to pursue.
- The investor does not get bored and ignore his or her portfolio for weeks. Instead, not only does the investor exhibit extreme patience, but may even be willing to hold onto the stock for a long time despite it becoming obvious that the profit looming ahead is a tiny one.
In essence, then, deciding on whether or not to participate in penny stock picks is less about the vehicle or the market and more about personal attitudes and inclinations. This market is really for people who have an interest in small market fluctuations. This takes a special mentality. Most investors like the big swings and the charge that comes with winning big. They like the thrill of hauling in whales, not minnows.
Are you a penny stock picker?
Let me know why you decided to choose this investment strategies!
Luke