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The Dollar Stretcher

Penny Stocks:
You Get What You Pay For

by Joe Chapin

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At the risk of opening up myself up to abusive e-mails, I feel compelled to warn as many people as I can about the dangers of investing in micro-cap and/or penny stocks. With so many quality companies available to invest in, it amazes me that there are so many people that play the lottery with these stocks. These stocks typically have very limited assets, in fact, in recent situations where the Securities and Exchange Commission (SEC) suspended trading in micro-caps the average company had barely $6 million in net assets with nearly half of those companies having less than $1.25 million. Sure, there are legitimate start-ups that may be worthwhile investments and yes, there are actually some penny stocks that are former NASDAQ issues that have fallen on hard times. But an increasing number of these stocks are pure danger, plain and simple.

One of the problems with penny stocks is the lack of reliable public information. When information on a company is at a premium, the inevitability of manipulation is certain. Many of these companies have no real track record, much less any chance of turning a profit. If you insist on investing in micro-caps, be sure to find out if the companies that you are considering have registered their securities with the SEC and./or state securities regulators.

Manipulation of penny stocks is a huge problem that shows no signs of letting up. Paid stock promoters shamelessly "pump" micro-caps in the newsgroups or in their own newsletters with their special "inside" information. As an investor, you should always be wary of stock newsletters as well as press releases that contain out and out lies about a company's sales projections on new products. You must do your own research.

I can hear the penny stock proponents now. They'll say "What do you know about penny stocks?" or "I have done very well trading penny stocks". If you have been successful, congratulations! You are one of the vocal minority. I also have some limited experience investing in penny stocks and actually did make a small profit; however, I can not justify investing large amounts of money in such speculative ventures. As Tom Gardner of Motley Fool fame said, "Penny stocks are the Internet's own version of lottery tickets". Well said!

These stocks are very thinly traded and none of them are tracked by any of the major investing firms. Penny stocks are valued at their penny levels for a reason.....they aren't worth much. While the markets do make mistakes from time to time, they generally do a great job of valuing a company, thus the value of a penny stock. Save your pennies until you can afford to buy a real stock.

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