Blog : 3 NEVERs of Penny Stocks
by Peter Leeds on January 18th, 2015
My lawyer reminds me that I should mention this is not trading advice. (She's kept me out of trouble so far!!)
"People say the odds of being eaten by a shark are low. Well, if you swim in the ocean at night with a bleeding leg, you WILL be eaten by a shark." - Peter Leeds
Every penny stock investor needs to learn the 3 nevers. They are simple, easily applied, and will keep you from all the downsides among these tiny investments. In fact, just about any penny stock mistake can be linked back to violating these 3 most important rules!
1. NEVER follow free stock picks!
It doesn't matter where you hear about them - online newsletter, chat room, website, e-mail, or in the postal mail. The only reason any stock is talked up is to drive the share price up.
Typically there is a promoter behind it all, and the only shares where their dishonest practices will work is with thinly-traded, low-priced penny stock businesses which are close to failure.Typically, individuals don't even realize they are being scammed. The mail-out looks glossy, or the web site looks professional... and the victims let their guards down.
Most individuals feel like they have done enough due diligence because they read a few paragraphs, and all the claims in the promotion seem logical... and exciting. "Maybe THIS little company will change the world, and make us shareholders rich!"
If this company is going to kick so much butt, ask yourself why they need your $500. Why are they even reaching out to you at all? How did they hear about you?
The way it really works is up-and-coming businesses get everything they need (money, support, guidance) from institutional investors and venture capitalists. Honestly solid and world-changing penny stocks do not need to promote their shares or their business.
If you find yourself getting excited about a penny stock that you heard about for free, then you've already lost. If you actually throw some money into the shares, then you just got scammed.
2. NEVER buy pink sheet or OTC stocks.
Stick to the exchanges which actually have reporting requirements, listing fees, and investor visibility. Legitimate companies aspire to trade on legitimate exchanges, like the Bulletin Board, AMEX, NYSE, and NASDAQ. The better-quality companies are concentrated on the better-quality exchanges.
On the other hand, awful companies tend to populate the garbage markets. Your grandma's quilting hobby could get listed on the Pink Sheets. A hot dog stand can trade on the OTCQX. The listing fees and reporting requirements are so low, or non-existent, that any business which can not attain a proper stock market listing will be found in the shadows here.
People say you have an almost non-existent chance of being eaten by a shark. Well, if you swim the ocean at night with a bleeding leg, you will be eaten by a shark. Likewise, penny stocks are thought to be risky, terrible investments. Well they are, and if you trade Pink Sheet stocks, then you are guaranteed to find them.Many people don't even realize that the Pink Sheets is not even a stock market at all. It is a system of matching up buyers and sellers, BECAUSE the stocks on it are not on an actual exchange. That's why it's possible to buy a Pink Sheet equity, and often be unable to sell it again, even if it increased in price!
Important Clarification: There is significant confusion (and who could blame you), between OTC and OTC-BB.
OTC means the penny stock is trading over the counter, and is therefore not on any exchange at all. Avoid OTC stocks.
OTC-BB mean over the counter bulletin board. The Bulletin Board is a subsidiary of, and owned by, the NASDAQ. The OTC-BB is a wonderful, regulated exchange, and you will find the majority of the great up-and-coming penny stocks trading there.
So, avoid OTC stocks at all costs. However, do trade OTC-BB stocks. (Try to guess how much confusion we have had to deal with over the last 2 decades)!
3. NEVER look back.
If you invest in the shares of tiny businesses as they grow, you will make some serious profits... However, the one downside of this involves selling too early. Who among us hasn't taken a great profit, only to feel bad as the shares kept climbing into the stratosphere?
The past "lost profits," and the future "what if" potential of our investments is strong enough to cause most investors to go down with a sinking ship, rather than sell ever. It seems many fear selling too early more than taking on extra risk.You must have a never-look-back attitude. This ensures that you really think about selling when it's time, and you are 100% certain in your decision when you do.
By eliminating the potential of feeling bad from selling a stock too early, you will trade more freely and with less stress. The end result will typically be better decisions.
Unfortunate Disclosure: I should admit that I've taken lots of profits way too early, and despite everything we've written here, the missed opportunities still feel pretty bad.
As one example of many, I bought Absolute Software (ABT) at 80 cents (split-adjusted). When it hit $7, I felt pretty good about banking my big profits, through 3 sales over a couple weeks.
Immediately afterwards ABT roared toward $30, and eventually a split-adjusted $64. I have a real hard time looking at making 10 times my money as a win.
Even my personal trainer was talking the other day about "kicking himself" for not buying Blackberry just before it had a nice pop. My best friend had a similar lament (although about a different stock), while I've heard the same types of complaints from a few of my poker buddies. Everyone misses out on some gains from time to time. Everyone.Speaking of poker, investing regret is so similar to regret in cards. Players often say, "If I hadn't folded, I would have won!" Sure, but if you "went in" every time with those awful cards, you would be broke before the pizza arrived!
Some techniques which investors apply, when they are unsure about taking profits:
- sell a portion of the penny stock, and let the rest ride
- if the business is still growing and on track, consider patience rather than action
- watch the trading volume. If the share price rise coincided with a massive jump in trading volume, this could indicate a new higher trading range for prices. However, if the shares are going to come back down, a drop off in volume will often alert you.
- ask yourself, "would I buy it today, if you had just heard about the investment?"
The point is to never feel bad about what could have been. If you do, then maybe this is not the game for you. You are trading penny stocks - that means you are going to make some gains, take some losses, avoid some big mistakes, miss out on some profits, and maybe even have a little fun.
Consider that you found and invested in a company which soared, even if you sold a bit too soon. That is great! Now you know how to do it! Do it again!
At the end of the day, the winners are the ones who experience every facet of penny stock investing, good and bad, and keep moving to bigger, better, gains. It's not about this or that specific trade, it's all about where you end up!
And I can tell you that abiding by the 3 NEVERs of penny stocks will help. Not observing the 3 NEVERs almost ensures that you finish broke.
As of January 2017 we no longer publish the blog and it has been removed from the webiste menu.
You are reading this old blog entry because we still like to reference it. :-)
You are reading this old blog entry because we still like to reference it. :-)
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