Are Penny Stocks Riskier?
The general consensus is – yes, they are. As a group they probably are, but if you treat microcaps just like any other company and get to know them before investing, learn the basics of their business, what their prospects are, then these companies are not much riskier than “blue chip” stocks. The only difference remaining will be the microcap’s unproven track record.
Lengthy track record is usually looked upon as the measure of safety. Though history never guarantees future performance, we still fall for the track record trap.
In July I observed that a lot of Canadian bloggers just looooved bank stocks, both American and Canadian, mainly for good history of increasing dividends. (I’m somewhat an anomaly in that I don’t chase after the dividend yet, but instead want aggressive growth through penny stocks.)
I started investing in April 2007, so this will be my starting point for performance comparison. Since April 2, 2007 Bank of America stock is down 24%, Citibank down 44%, Washington Mutual – 63%, average – 44%. (Canadian bank stocks are doing much better, they’re actually slightly higher than they were on Apr 2.) Nonetheless, the point of this exercise is that even such seemingly stable and prestigious stocks like American banks with very long history are prone to failures.
For the record, my Canadian portfolio overall currently stands at -35% with some stocks being near break-even.
“Safe investment” remains an oxymoron.
Oxymorons list: SAFE ABORTION – SAFE AND SANE FIREWORKS – SAFE INVESTMENT – SAFE SEX – SAFETY GLASS – SAFETY HAZARD