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USNews: 5 Reasons to Avoid Penny Stocks at All Costs

USNews: 5 Reasons to Avoid Penny Stocks at All Costs

By    |   Thursday, 31 March 2016 07:15 AM


InvestorPlace’s John Divine says that Ben Franklin's famous adage, "a penny saved is a penny earned," still applies to today’s investing environment.

Perhaps, too much so, he explains.

“Ironically, one of the more dangerous traps investors fall prey to is the penny stock, an extremely inexpensive stock whose chief allure – its low share price – often tricks investors into thinking they're getting a great deal,” he wrote in a piece he wrote for US News and World Reports.

Here are his 5 reasons to stay away from penny stocks:

  • Lack of liquidity. Robert R. Johnson, president and CEO of the American College of Financial Services, says penny stocks are usually "small-market capitalization companies, with very high volatility, and poor liquidity."
  • Scam artists and get-rich-quick schemes. "The penny stock market is heavily manipulated and exists primarily to separate unsuspecting investors from their hard-earned savings," David Twibell, president of the Englewood, Colorado-based Custom Portfolio Group, says. "Scammers abound, and Internet message boards are rife with hot tips and recommendations designed to lure investors into thinking they've found the next Microsoft," Twibell says. "In reality, many of these companies are in financial trouble or have pie-in-the-sky business plans without any meaningful revenue or earnings."
  • Wild West Trading Environment. Developments in companies represented in the Dow Jones industrial average are documented in prominent financial media outlets, Divine explains. “Penny stocks generally trade in the wild, wild West of the over-the-counter market, which means that their reporting requirements tend to be minimal,” said Newsmax Finance Insider Charles Sizemore, a portfolio manager on Covestor and chief investment officer at Sizemore Capital Management, a registered investment advisor in Dallas. “It can be exceptionally hard to find reliable information about them.”
  • Play time with play money. "Penny stocks can actually be a lot of fun to trade," Sizemore says. "But that's just it. When you trade penny stocks, you should do so with your play money. Think of it as recreational trading and not the sort of investing you would do with your retirement nest egg."  But Divine says that "the allegation that that all penny stocks are worthless investments isn't always true. Every now and then, some obscure pink sheet player will rip off a face-melting rally and earn early investors some epic returns."
  • Long shots with even longer odds. "At the track there is usually a reason a horse is a long shot: it can't run fast," says Jeffery Born, professor of finance at the D'Amore-McKim School of Business at Northeastern University. "Penny stocks are the long shots of the investing world. For every one that pays off big, there are many, many more that don't."
OK, so if you are wary of penny stocks, there are other viable investment strategies.

To be sure, CNBC's Jeff Cox, co-author of "The 30-Minute Millionaire" is sharing the tips investors need to know to profit from the market by spending just a half hour a week on their portfolios.


“This is not a get-rich-quick scheme,” he explained to CNBC. “This is a get-rich-smart scheme.”

"The 30-Minute Millionaire," co-authored by CNBC.com Finance Editor Cox and his writing partner Peter Tanous, is a blueprint for a road ahead that looks very different than the one traveled since the bull market began in 2009.

Cox and Tanous, chairman of Lynx Investment Advisory, see a slow-growth world in which investors need to shed short-term thinking and use passive strategies to deliver consistent returns.

Cox said the goal is to avoid having retail investors avoid the hassle, danger and guesswork of picking individual stocks. “Leave stock picking to the smart people, to the pros,” he explained.

“My biggest concern with watching the market over the last seven years or so has been the ‘short-termism’ of investors,” Cox explained. He said most small investors “react to events too easily and to things that don’t matter to their long-term goals.”

Cox doesn’t discourage investors from doing their homework or obtaining information on stocks, but then suggests turn to ETFs or index funds as opposed to picking individual stocks. “You should know your investments completely,” Cox said. “Get the information, stay informed, stay on top of things,” he said.  “Keep your perspective in the long term,” he said.

(Newsmax wire services contributed to this report).

© 2019 Newsmax Finance. All rights reserved.

   
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The odds are stacked against investors who try to make money with penny stocks.
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2016-15-31
Thursday, 31 March 2016 07:15 AM
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