Penny Stock Misconceptions
Unfortunately, traders are prone to a number of misconceptions about penny stocks. Knowing and understanding these misconceptions can help you make the most of your investment and avoid unnecessary risk:
They can’t fall much lower. If a stock falls to pennies from several dollars or more, some investors wrongly believe that the shares can’t go much lower. Don’t make the mistake of comparing any stock to where it was before, because the stock has no memory, and past levels have no bearing as to where it may go from here.
For example, even a stock that fell 99 percent — from $5 to 5¢— can go a lot lower, and might just be on its way to 0.
It’s not a big investment. If you invest $500 in a stock rather than $5,000, you’re risking less money. But the size of your downside has no bearing on whether the underlying shares are a good investment. If your reasoning is that you didn’t invest a lot, you’re gambling. If you buy stock because it has an outstanding management team, low debt load, and expanding market share, you’re investing.
The downside is smaller than on blue-chip stocks. Just because penny stocks are closer to zero than large blue-chip stocks or more expensive shares, it doesn’t mean that they are less risky. A $455 stock can go to 0. A 4¢-penny stock can go to 0. In either case, you can lose 100 percent of your investment.
My aim in addressing these risky assumptions is to help you approach penny stocks in the most knowledgeable, and therefore most profitable, way. Every dollar put into the market is at risk, and by being fully aware of that risk, you are in a better position to make wise trading choices.