One of the craziest stock market investment strategies that does the rounds every so often is that you can make a mint buying penny stocks.
Ok, sorry to burst your bubble but Nuh Uh!
Look, I’ll admit in theory they sound friggin’ awesome.
Here is how they are supposed to work.
Find a stock that is currently trading at a really low price (it’s rare that they are ACTUALLY trading at a penny – most of the time they are just really low priced and generally always under a buck).
So let’s say you invest $10K into one stock that is trading at 0.01 cent per stock (for ease of argument). Essentially you’ve just purchased 1 million shares of that company for your $10K (10,000 divided by 0.01).
Now all you have to do is wait until the stock price rises just ONE cent and you’ve just doubled your money.
Sell your 1 million shares at 0.02 cents and you get back $20K – giving you a cool 10 thou’ profit in your pocket.
Except it doesn’t actually really happen like that. It’s just as hard for a penny stock to rise by 100% as it is for any other stock in the market.
Not to mention that these babies usually have really low trading volume so that trying to buy 1 million shares (like in our example above) would be rather difficult to accomplish (you need both buyers and sellers at each market price for a trade to occur).
And even if you DID manage to buy that many stocks at a time, you would invariably move the market against yourself. So if you are buying at a low price, you’ll tend to move the price up just from your trade and if you are trying to sell you’ll move the price down again.
The people who do profit nicely from penny stocks are often times running some sort of manipulation technique. They’ll tell you about this ‘hot stock’ that is about to double in price and as you buy in, they buy out. So they get their money and you are left holding a worthless stock.
Please don’t be fooled. Make sure all the companies that you into have strong fundamentals.
If you follow my rules you’ll never be caught out on dodgy schemes like this because I insist that the companies have sound financials and are the biggest in the market.
Stay safe rockstars.