Why I Like Penny Stocks
The Canadian Capitalist has gracioulsy included me in his New Blogs List, but I’m left with an unpleasant feeling over his critical remark about not liking penny stocks. I perfectly understand that it’s a personal preference and an opinion, and everyone is entitled to one, and I know it’s nothing personal too. I want to respond anyway.
I could see if the problem was with speculating/day-trading – but penny stocks? Didn’t all companies started as penny stocks originally?
By the way, my most successful investment to date was a penny stock. Back in 2004 I was looking to get “into the market” and didn’t want to risk much – I’m talking $500. I went through the entire stock list in the Wall Street Journal, high-lighted companies under $5 with low P/E, then researched that paired down list, and finally bought 100 shares of Wheaton River Minerals at $3.60/share.
Soon after that, the company was bought up by Goldcorp at 1-to-4 ratio, and I ended up with 25 Goldcorp shares. I sold them today for a net profit $250.81 (about 27% annual return). I held the shares for 2.5 years. I could’ve sold them for $40 last spring but kept holding as I read everywhere that holding long-term is the smart strategy. I’m bitter about that 🙂
As for day-trading, I see that it’s often frowned upon. It’s resented and viewed as an inferior investing method that almost always leads to losses.
Here’s why I like penny stocks and day-/swing-trading:
- I find research interesting and don’t mind being an active trader. If I get tired, I will look at the ‘buy once – hold forever’ style.
- It’s exciting, and something I see doing as a hobby. Some hobbies cost a lot, and this one can actually make me money.
- I’m not investing/risking a significant amount, and not taking it away from our business. ‘Nobody gets hurt’.
- I’m young enough to make up for any losses.
- I don’t buy or plan to buy ‘lottery-type’ stocks (not much anyway). If my swing-trade becomes an investment, and goes up gradually over a year or two, I won’t be upset.
- I believe I can day- and swing-trade succesfully. Potential rewards are higher. I may re-think that later, but at the moment I’m not entirely convinced that I can make more money by long-term investing.
- I’m also not convinced that non-penny stocks are significantly safer. Some of the best and supposedly reliable large-cap companies have gone bust. Some are just disappointing (4.9% annual return on my 7 PG stocks. Plus dividends – that’s about the only nice part about it).
- There have been decades of down market. If one comes along, it’s possible to make money on day-trading even in a down market.
I haven’t changed my mind about putting together a ‘Lazy’ index fund portfolio that is so widely recommended, but 10% average return (probably even 7%, historical market average) is just not enticing enough, now that I’ve had a taste of 30% returns. I will definitely be more willing to do it with a larger amount of money. More money = less risk-tolerance for me.
Everyone has reasons for doing what they do, and these are mine.
Final note:
I do not advocate anything, I simply share my experiences. I don’t claim to be an authority on things financial and I don’t give out “sound advice for the average investor”. If you, dear reader, get excited about penny stocks, it’s not my fault, ok? Do your due diligence. If you think this is not for you, well then, you can still live vicariously through my thrill rides 🙂
Found your site through Cdn. Capitalist. Great material.
Risk is all a matter of perspective. As a huge generalization, self-employed people have a greater degree of risk tolerance than others (being self-employed myself I see it everyday talking to others).
Penny stocks tend to give the illusion of risk- if you don’t know what you are doing.
If you stick to your knitting and do it well then no one can really argue can they? Best of luck with penny stock investing.
That’s interesting. I always thought of myself as a chicken, but you’re definitely onto something here 🙂
Will try hard to prove myself right (and them wrong, of course), thanks!
I’m here from CCs site as well. Looks like an interesting site.
I think that penny stocks have the reputation of being vehicles for fraud ie pump and dump schemes so a lot of people (myself included) are very wary of them.
I don’t think most companies start as penny stocks…some of them just end up that way.
You mentioned you bought penny stock shares for $3.60…what is the definition of penny stocks, I had assumed literally it was shares that traded for less than a dollar?
Mike,
shares under $1-5 are usually considered penny stock, depending on who says it.
I believe that’s a reasonable concern in regards to penny stocks, but that’s why you still have to research the company. A lot of them go on to become really big players.
Take Walmart, for example, which was a penny stock (by up to $5 definition) for several years when they just started. Penny stocking doesn’t have to automatically mean day trading, so let the pump-and-dumpers do their thing, but if you believe the company has potential you still may do just fine long term.
And here’s some Wikipedia info on penny stock definition:
The official Securities & Exchange Commission definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an “over the counter” listing service, such as the OTCBB or Pink Sheets. The terms penny stocks, microcap stocks, small caps, and nano caps are also all sometimes used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service.
Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter.