Friends and family often ask me where they should put their money now.
I always answer, “Penny pot stocks…”
And then emphasize that I’m kidding.
But people do love themselves some penny stocks. Investors dream of buying a stock in the low single digits and watching it explode to double digits, making many times their money.
However, there are a lot of misconceptions about penny stocks…
So once and for all, I’m going to let you in on what is true and false about them.
Myth No. 1: Penny stocks have greater potential to double or triple than larger stocks do.
Investors believe it’s much easier for a $2 stock to become a $4 stock than it is for a stock trading at $100 to rise to $200.
Tell that to owners of Tesla (Nasdaq: TSLA)…
The stock traded at $211 in September 2019. It climbed to more than $1,000 this month and currently trades well over $900.
A stock’s price will have no effect on whether it can rise 10%, 20% or 100%. What matters is how much supply and demand there is for the stock.
If a small company makes a big announcement but no one is following it, it might be hard to drum up interest in the stock.
On the other hand, when an unknown company like Inovio Pharmaceuticals (Nasdaq: INO) suddenly finds itself in the spotlight, the stock can rise from $2 to more than $30, like Inovio did in the past nine months.
Myth No. 2: All penny stocks are tiny companies with little revenue or profits.
There are quite a few energy companies whose stocks trade for pennies, such as Noble Corp. (NYSE: NE). There are also companies like Acorda Therapeutics (Nasdaq: ACOR), which should have at least $100 million in revenue this year.
Sirius XM (Nasdaq: SIRI) has a $1 billion market cap and generated nearly $8 billion in revenue last year. It trades for less than $6.
Myth No. 3: Investing in penny stocks gets you in before Wall Street’s big players.
This is partially true.
Many mutual funds and other institutional investors have their own rules against buying stocks that trade below $10 or $5.
But many others do not have those restrictions. There are plenty of hedge funds and other institutional players that own penny stocks.
Myth No. 4: Penny stocks don’t pay dividends.
Most penny stocks don’t pay dividends because many are still young companies in their early growth phase.
But some do…
Sirius XM pays a dividend. So does Manhattan Bridge Capital (Nasdaq: LOAN), which trades for less than $5 and pays a 9% yield.
Myth No. 5: All penny stocks are risky.
A lot of penny stocks are garbage companies. Many others are priced low for a reason.
But there are plenty of quality companies – businesses that are just beginning to gain some traction, undiscovered by Wall Street – that make for great investments or short-term trades.
If you trade penny stocks, make sure you understand the risks, the potential profit, why you’re making the trade you are and what strategies you have to limit your risk, such as trailing stops.
Penny stocks can be lucrative as long as you know what’s true about them and what’s myth.
About Marc Lichtenfeld
Marc Lichtenfeld is the Chief Income Strategist of Investment U’s publisher, The Oxford Club. He has more than three decades of experience in the market and a dedicated following of more than 500,000 investors.
After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report, among other outlets. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer’s TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance.
Marc shares his financial advice via The Oxford Club’s free daily e-letter called Wealthy Retirement and a monthly, income-focused newsletter called The Oxford Income Letter. He also runs four subscription-based trading services: Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits.
His first book, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns, achieved bestseller status shortly after its release in 2012, and the second edition was named the 2018 Book of the Year by the Institute for Financial Literacy. It has been published in four languages. In early 2018, Marc released his second book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazon’s bestseller list. It was named the 2019 Book of the Year by the Institute for Financial Literacy.
