There are lots of myths and misconceptions about penny stocks (PS) that scare investors away from putting their money into penny shares. Well, people once believed the earth was flat and giant sea monsters devoured sailing ships before the age of enlightenment busted those myths. Now it’s time to bust a few myths and enlighten perceptions about this potentially lucrative investment vehicle.
Myth #1 - Investing in PS is inevitably a money losing proposition
Lots of people have made lots of money - and quickly - on penny stock plays. Of course, there is risk involved in investing, as there is in investing in any equity. But the key, as with any investment, is to be informed and educated through research. When considering this investment option, don’t just take your buddy’s word about a hot tip. Research the company. Subscribe to reputable newsletters. Track the stock’s performance. Talk to senior people within the company. Being informed about the stock lowers your risk exposure - and increases your odds of making a nice profit on your investment.
Myth #2 - It’s easy to make money on PS
This is almost the exact opposite of Myth #1, but it’s just as big a misconception. It stems from the very real notion that you can buy a stock for two cents in the morning, sell it for four cents in the afternoon and effectively double your money. The possibility of making big money that quickly exists, but it’s certainly not that easy. Again, you need to be as much informed about a stock as possible through research - otherwise, you may find how easy it is to lose money.
Myth #3 - PS companies are failures waiting to happen
Many people figure that they are priced so low because the company is a poor performer. The fact is that many of these companies are profitable and have healthy balance sheets. Remember as well that many companies are new or small, and although they may not yet be profitable, it doesn’t mean they are not well run and on their way to one day being a large-cap success. Again, do your homework. Look for companies that have a sound corporate structure and management team. Analyze accounting sheets and 10K financial reports and look for signs of sustained growth. Find out if they have a niche in their industry or a product or technology that sets them apart from their competitors.
