I recently wrote the Top Ten Mistakes that Investors Make. I have been breaking down each of those mistakes in greater detail. This one is the #6 mistake, buying low priced stocks. But wait, why do I have a picture of Laverne?
Now, make no mistake that you can make a large profit if you get in on a penny stock at a buck, buck fifty, and ride it up to double digits. For example, @Road Inc. (symbol: ARDI), traded as low as $1.51 in June 2001. It reached a high of $16.82 in early 2004. Over a thousand percent return! As of this writing, ARDI is trading at $5.18. Still a tidy profit if you managed to buy at the lows under two bucks, but what a loss from its peak!
The problem with this type of investing is that investors rarely do the same level of due dilligence and research when they invest in penny stocks. It is seen as a gamble, and approached with as much caution as the craps table. And who can blame them, look at the highs and lows of @Road above.
The thinking is generally that you can pick up about a thousand shares for cheap, and if this stocks somehow gets up to ten bucks, that's a sweet profit! The percentage of stocks that make a run from a buck to ten is much lower than the number of stocks that continue to flounder, or even worse, go under. Remember names like Enron, Worldcom, pets.com? On their fall from extraordinary heights, they passed $50, $10, and yes, $5 and $1 on their way to Zero.
Don't get sucker in because, "it's just a buck a share." You may end up paying a higher transaction commission on your way too a thousand or ten thousand shares, and your still losing a thousand or ten thousand bucks if the company goes away. Just as a reminder, take a look at my list of top ten defunct companies.
Even the biggest can fall from grace. And they ALWAYS pass through $5 on their way down.
Remember, odds are good that the market has placed that low value on the company's stock for a reason.
And most importantly, read my disclaimer: This is general advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio. You, alone, are responsible for any losses or damages that may and will likely result from your financial decisions.
Oh, the Laverne picture? She's Penny Marshall. You get it? Cause we're talking about penny stocks! haha. That's funny stuff.