Penny stocks can be high risk, high reward
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The temptation -- and the danger -- that comes with trading in penny stocks, generally described as stocks that trade for less than $5 a share, is that much greater in a turbulent economy when people have less money to invest.
Pick the right one, and the bang for the buck is quite good. But the wrong one could be a bust or even a scam.
"Penny stocks are becoming much more popular not just in spite of the economic weakness, but because of it," said Peter Leeds, author of "Invest in Penny Stocks" and CEO of PennyStocks.com in Toronto.
"With less money to invest, people have fewer options, and they are more desperate for returns. They find penny stocks may be a way to make something out of a small investment."
The math certainly looks good to discount hunters looking for a find.
- Ninety-five percent of penny stocks on the market are bad investments.
- Never buy pink sheet companies or trade a penny stock recommended from free newsletters, faxes, emails or message boards.
- Find out why a stock is trading for pennies a share. Is it simply overlooked and undiscovered? Or are there other reasons?
- Invest in penny stocks with only the money you can afford to lose in a worst-case scenario.
Source: "Invest in Penny Stocks" by Peter Leeds
Someone with only a couple of hundred dollars to invest could barely afford one share of IBM stock, which currently trades for about $160 a share. But that same investor could afford about 1,200 shares of Wizzard Software Corp., (WZE) a publicly traded software products company on Baum Boulevard, with a stock price of about 17 cents a share.
Even a 1-cent increase in the share price of Wizzard represents a nearly 6 percent profit for the investor, whereas IBM's share price would have to reach $170 for a similar 6 percent return.
First Published August 23, 2011 12:00 am
